Warning: Some transaction prices can be detrimental to your house price index

Abstract

There is a broad consensus in international statistical organizations such as Eurostat and the International Monetary Fund that house price indices (HPIs) should be constructed using transaction data. We show here how transaction data for new-built properties can undermine the timeliness of hedonic HPIs when new-built properties are pre-sold during the planning or building stage, but entered into deed books only once the projects are completed. As a consequence, HPIs for new-builds will include stale transaction prices. We investigate this issue for two Polish cities (Warsaw and Poznan) and find that HPIs for existing properties lead indices for new-builds by up to 2 years. This lag can dramatically distort National HPIs. The lag also has implications for the flagship measure of inflation in Europe—the Harmonized Index of Consumer Prices (HICP)—since it is planned to include owner-occupied housing in the HICP using a transactions HPI specifically for new-builds. We show that the timeliness issue disappears when preliminary agreements on new-builds are used instead of transactions in the compilation of an HPI.