Working with Data on House Prices
Review Questions
1. Reliable house pricing data is more important for public and private organizations in UK than in other countries for housing constitutes a significant proportion of the entire household belongings. In countries like UK, housing is regarded as the yardstick to gauge social and economic development. Public organizations use house pricing data to formulate macroeconomic policies, which determines overall financial health of the country. Trends and volatility in house pricing reflect potential economic factors that might have influence over the economy and development of the country. On the other hand, private organizations in UK, especially those related directly to the housing business, plan their business strategies and device social policies based on the trend in house pricing because it is an indicator of people’s purchase power. Without reliable and well-presented data, it is not possible to develop economic plans.
2. ‘Demands for prompt estimates of house price inflation can clash with demands for reliable estimates of house price inflation.’
3. The accurate figures published by an organisation involved in financing house purchases might not represent the average price of the entire stock of dwellings for many reasons. For example,
- Limited sample: individual organizations that are involved in financing house purchases publishes accurate figures on house price based on their customers who are limited in numbers. The limited size of the sample can reflect a small geographic territory accurately but fails to represent the average price of the entire stock of dwellings, which can only be obtained through a much larger sample that is the representative of the entire population. The limited sample size, limited within a small geographic area cannot impart the necessary information to forecast a viable housing price.
- Shorter time span: individual private organizations generally publishes house price data over shorter period of time. They prefer highlighting short-run volatility to convince customers purchase houses and get the wrong impressions about the purchase or price trend. Their data are well-crafted to suit to their business goal of provoking more people in purchasing house and taking loans. On the other hand, the average price of dwelling stocks are results of long-term variations in housing prices, which unlike the short-run prices, takes a large time span of house pricing into account. Obviously, the accurate pricing indicated by private organisations are good for estimating current trend but not the historical trend as the average price is. For a large purchase like housing, the latter should get preferences.
- Lack of consideration about mixed properties: individual farm publishes data based on the sample purchases that involved mortgages or financial loans from their organizations. They do take cash or other types of purchases into account. Obviously, their data are biased and less representative of the actual picture. House pricing for mortgaged purchases are not similar to cash purchases. Therefore, these farms are not capable of offering reliable information based on the survey data.
4. a. The distinction between a decrease in average house price and a decrease in house price inflation is that the former represents the reduction in the overall rate of change in the prices of housing for a particular time and is limited by a specific time frame. On the other hand, a decrease house price inflation indicates the changes in average price over a period of time span that is spread over a time period. For example, a decrease in average house price in 1969 indicates the change in the actual price of the house within the specified year, whereas a decrease in house price inflation indicates that the average price has decreased over a time range say over 10 years. The former works with the actual price whereas the latter works with the average price.
b. The distinction between an increasing house price trend over time and house price volatility over time is obvious as long as the time span is considered. The former indicates historical price increase over a large period of time whereas the latter indicates an increase in housing price in short run say within one month or shorter. The former is related to long turn planning whereas the latter is related to short term fluctuations. A short run data cannot offer reliable information about the house pricing offers and trend.
c. The annual rate of inflation indicates the average rate of inflation over one year whereas the annualized rate of inflation indicates the average rate of annual rate of inflation averaged over time. The former takes average of the nominal inflation values over shorter time period whereas the latter measures average of annual rate of inflation for many years.
5. The average real house price is adjusted for inflation and is least affected by inflation, whereas, the nominal house price in contrast is not adjusted for inflation and reflect the effect of inflation. From this perspective, the average real house price can fall whereas the average nominal house price can rise due to inflation. It is logical because the inflation can lower the value of money and raise the prices of products substantially.
6. The implication and the field of application distinguish macroeconomic policy purposes for using house price data from microeconomic policy purposes for using them. From macroeconomic viewpoint, house price data indicates the tread in cash flow, people’s willingness to spend and their savings. Obviously, it helps the government in fixing inflation rate, monetary policy accordingly. On the other hand, the price of house indicates microeconomic factors such peoples’ income, their interest in taking loans and so on. Individuals can make their saving and purchase decisions based on the economic conditions prevailing in the country. So, both macroeconomic policies and microelectronic policies make use of house pricing data to formulate their own strategy and develop their future planning. In short, both the economies can use the house price data for policy formation and strategy setup, which has the likelihood of being more realistic.
