SQM Research has taken aim at RP Data and Rismark over their new daily housing index, claiming it opens the potential for manipulation and is likely to produce false readings.
RP Data last week announced it would launch a daily hedonic housing index, which purports to measure daily price movements in the housing market on a tradeable index. SQM managing director Louis Christopher has criticised the move, and questioned the reliability of the index.
While Christopher commented that he welcomes "improvements to the transparency of house price information", he said any hedonic index made "massive assumptions" about property attributes, and claimed a daily index ran the danger of delivering inaccurate information.
"The hedonic index assumes we all will develop the same amount of appeal towards the same type of attributes in a property by the same magnitude. Not only does it assume a purely rational property buyer, but all buyers having exactly the same desires as each other. Straight away this is not reality. Think of swimming pools. Not everyone likes a swimming pool, yet the hedonic model assumes we will all desire one," he said.
Christopher also claimed the index ran the danger of manipulation, with data collectors increasing the value they assume buyers place on one property attribute while decreasing the assumed value of another.
"For example, if one wanted the index to record a rise for the month, yet the raw data to date suggests there has been a fall, all one may have to do is decrease the desirability assumption of, say, views and increase the desirability of bedrooms. That could then affect the index to the point where a fall in the index turns into a rise," Christopher said.
The analyst also expressed reservations over attempting to measure sentiment toward housing on a daily basis.
"No doubt, sentiment towards real estate would change on a daily basis given what is happening in the economy. So if sentiment in real estate does change daily is it possible to really measure this? We think not as there just simply isn't a big enough sample size of data that comes through covering each present day," he said.
Christopher showed particular concern over the timeliness of transaction data. With RP Data and Rismark saying the index will not be revised, Christopher claimed transaction data will lag and that the index will miss out on "over 90% of transactions which will never be adjusted for or taken into account in the index".
"The crazy thing is this company was putting in extensive revisions on their monthly hedonic index and yet now they see no need to revise on a daily index?" Christopher said.
Christopher said the hedonic method was "a good method, but not without its flaws". He claimed that these flaws had "rarely been reported until now", and again criticised the index for not taking revisions into account.
"Sorry but revision is absolutely necessary in this game. Needless to say, best of luck with your index guys," he said.