A Note on the Meaning and Uses of Different Property Price Indices

There exist many different public indices which all purport to measure in some way changes in value in property markets.The primary purpose of this paper is to discuss what the various index methods actually represent, the significantly different results they can give and their successes or failures in terms of a specific purpose, for example in understanding housing affordability, tracking the value of a portfolio or being suitable as a reference asset for the settlement of derivative contracts. This paper aims to establish the ideas that there are two broad classes of economic questions answered by indices and thus two classes of index methods (quantile based and portfolio trackingIndices designed to estimate market value all do so by constructing an approximate market portfolio and estimating its value. These market value indices really can be ranked in quality, based on the coverage of their approximate market portfolio and the quality and amount of information they use to value it.We describe the trading strategy represented by (or equivalent to) each index calculation method and analyse the appropriateness of the various index methods from the perspective of tracking portfolio value. In particular, we show that the portfolios associated with repeat sales, adjacent period hedonic and hedonic imputation indices cover significantly different proportions of the market. This partly explains the differences in their accuracy as estimators of market movement. Additionally, we show that quantile based indices cannot be credibly used as estimators of market movements, since their associated market portfolio is not self financing.We discuss appropriate usage of the index types. For example, smoothed median price indices can provide valuable information about housing affordability, whereas hedonic imputation indices are the best portfolio valuation tool