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. However, transaction data for newly-built properties lag behind actual market developments as prices are typically set months or years before transactions are finalized. We find that for two Polish cities (Warsaw and Poznan), HPIs for existing properties lead indices for new builds by up to two 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 dis-appears when preliminary agreements on new builds are used instead of transactions in the compilation of an HPI. (JEL Codes: C43; E01; E31; R31)