Do people really understand property price indices?

By Alan Cheong / Savills, The Edge Property | October 26, 2015 9:27 AM SGT
The rise and fall of prices is standard fare during casual conversations or discussions among intelligent- sia. In the case of stocks, when prices rise, the consumption of goods and services increases as discretionary spending increases. For property prices, the same happens. However, there is a distinction between stock and property markets and, therefore, between stock and property prices. To many, the distinction is that the former is a competitive market while the latter is an imperfect market. While this is true, there are also other differences between the two markets, one of which is the price behaviour of the constituents that make up the real estate sector. This difference has never been mentioned in daily conversations or by publications on commercial research.
For starters, if one were to run simple statistical tests on whether quarterly price changes in the URA Private Residential Property Price Index (PPI) are random, the result shows that it is not so. This means that prices tend to go up and come down in a series of runs. On the other hand, stock price changes, whether on a daily, quarterly or some other periodic basis, behave randomly.
Chart 1 shows that although both the URA PPI and FTSE ST Real Estate Index look rather similar optically, they are, in fact, different from a statistical standpoint. The directional change in prices in the former is not random, but for the latter, it is. This one difference in price behaviour between the two markets holds lots of information that thus far many appear to have overlooked.
Chart 1

Source: Savills, URA, Daiwa

Also, the behaviour of prices in non-direct real estate markets may have subtly influenced market observers. For example, it is common for observers, be they from the real estate or financial industry, to look at real estate price changes as though they are the same as those in the stock market. This has happened in recent years, when opinions on the performance of residential property prices were given by observers who predicted double-digit price declines after consecutive layers of cooling measures were applied.
Even then,...