Real estate data review – using House Price Indices as an example

The Nigerian real estate sector lacks adequate transparency when it comes to data, sources and statistics. There is an urgent need for policies that will empower comprehensive documentation of all attributes of price determinants for the evaluation of various asset classes in Nigeria. It is thus important to recognise the need to develop a reliable database on the actual price trends in the real estate sector.

Property price indices aim to capture the trend in the average price of assets in a given area. However, the nature of the property market complicates standardisation in index construction. For one, real estate is not a homogeneous product. Properties vary immensely in several dimensions, some of which are not easy to quantify. While segmentation of the market in terms of asset type, location, size or age may be straightforward, controlling for quality of construction, customer appeal or level of comfort is less obvious. In addition, properties in Nigeria change hands through bilateral transactions and not in centralised markets. This requires mechanisms to collect dispersed price information in order to create a representative index, as indices with different characteristics provide different messages even for the same country. These practical difficulties also explain why in many cases statistics have been gathered (at least initially) by private sector firms and associations with specific commercial interests, while public sector efforts have lagged. This pattern is even more pronounced in the case of commercial property, where heterogeneity and dispersion of transactions are even greater and hardly any official statistics exist.

Properties, land, and so on, are available day in day out, but unless your property is up for lease or sale and published by the known real estate bloggers and agents, no one has adequate or valid information on any asset or real estate in general. Traditionally, landlords are known to be secretive when it comes to the exact cost of their properties. In addition, no actual record is ever published online or by the government to validate the worth of any asset. As a result, analysts, policymakers, and financial institutions have had to invest in and develop their own individual skills by following the trends in house prices to expand their understanding of real estate and credit market conditions, as well as to monitor the impact on economic activity, and financial stability and soundness. This is particularly important for mortgage lenders who use the information on house price inflation to gauge default risk. In other words, understanding the pattern and nature of property price dynamics has become an important element in assessing the macro-economic situation and outlook of the country.

Property price indicators differ in three principal dimensions:

• their geographical coverage
• the source of information on property values
• the approach to controlling for differences in property characteristics.

In mature markets like the United Kingdom, there are more than 50 indicators released every week, month or quarter that inform the property world. Analysts examine how these indicators might inform a property market forecast and also clarify what they measures, how they are computed, how they have evolved, and why they are important to real estate markets. The result of this research is what has given birth to the indicators that are regularly released. A good example of this is the House Prices Indices.

The House Price Indices (also Residential Property Prices Indices – RPPIs) are index numbers measuring the rate at which the prices of residential properties are changing over time. The House Price Index (HPI) also shows the price changes of residential properties purchased by households (flats, detached houses, terraced houses, etc.), both newly-built and existing ones, independently of their final use and independently of their previous owners. The HPI is an independent price index aimed at measuring price developments for dwellings transacted in the market. In order to put house price dynamics into perspective, analysts have developed other indicators that combine the HPI with, for example, the price index of rents (in the form of a price on earnings ratio) or measure affordability using price-per-capita disposable income of households.

The first and most important issue in the compilation of HPIs is the availability of data on purchases. This refers to information about the price of the asset and its characteristics influencing the price, including asset type (land, flat, detached house, terraced house, etc.), its size and location.

A second issue is the heterogeneity of the property market, where virtually every asset bought and sold is different from the others in some respect. Prices cover the acquisition cost of a property in itself, and not the total cost that is necessary to acquire, own and maintain a residential property; so other costs related to the acquisition of the property and major repairs are ruled out from its scope. The consequent quality adjustment from one time period to the next is also a major methodological issue in compiling HPIs.

Nigeria is among the countries that are yet to have a comprehensive housing database. This has had a negative effect in constructing Nigeria’s monthly or quarterly HPIs, which are needed for National Accounts compilation and for the construction of a robust consumer price index, especially now that governments around the world are cautious and also structuring policies in a way to tackle a crisis that might be caused due to real estate bubbles, as well as understanding the timing and causes of the bubbles. Hence the need for housing policies that will empower comprehensive documentation of all attributes of price determinants for evaluation of residential property in Nigeria. It is important to recognise the need to develop a reliable database on the actual price trends in the real estate sector.

 

Chinwe Ajana-Sagna