The entire economy is interconnected with the real estate sector. A nation’s GDP will rise if its real estate sector is growing. Economic mayhem can also be caused by a decrease in real estate activity. Governments need to monitor real estate closing. The government can monitor the real estate sector and identify potential problems before they become major or significant. These problems can be addressed with fiscal and/or monetary policy. But it is important to identify the problems before a solution can be reached. A tulum mexico retirement real estate price index is therefore necessary.
In ideal cases, such an index would serve as a barometer for the entire market. Because of the nature of the asset, it is challenging to create real estate indices. This article will address some common problems encountered during the creation and maintenance of real estate price indexes.
Common Problems Associated with the Creation of a Real Estate Price Index
- Heterogeneity: First, real estate is an entirely different asset class. It is not comparable to assets such as stocks or bonds. Real estate units are not all fungible or homogeneous. Real estate transactions are unique in that the nature of each transaction is different from one place to another. Therefore, it is difficult to determine the price changes. This is the most difficult aspect of creating an index for real estate prices.
- Liquidity: Regular trading of bonds and shares takes place at all price points. Investors are given information about the number of shares or bonds sold at a particular price to get an idea of the authenticity of the quoted prices. Real estate is different. Sellers tend to keep their homes and delay selling when prices drop. A real estate price index does not accurately reflect the negative sentiment or downfall in property values.
- Reporting frequency: Real estate is not subject to a short investment period like stocks and bonds. Real estate values are stable over time. It is therefore not necessary for real estate indices to give different quotes every day. Real estate indices typically give a quote once every three to six months. It is difficult to see the change in real estate prices. To get a feel for the property market, one must track the same index for at least a year.
- Incorrect Valuation Investors are not motivated to report incorrectly the value of their bonds and shares. Property sales are not subject to the same rules. Taxes on property sales can be very high. To avoid such high taxes, it is common to report a lower price to the government. A lower price means a lower profit, and therefore lower taxes for the individual. The balance amount is usually paid in cash and not often accounted for. This distortion distorts all information. As a result, price indices do not give accurate information.
Methods to create a real estate price index
- An index can be created by simply providing a weighted average of all property transactions reported over a period. Although this method is accurate, it is not the best. It is used in Australia, Spain, Germany, Spain, and the Netherlands. This method does not take into account the heterogeneity of properties. The results can be misleading because all properties are merged. The index may still show a positive trend if the urban values continue to rise while the rural ones are decreasing.
- Many economists use the Hedonic method to solve the problem. This method does not display a single value. Instead, the entire property market in a nation is broken down into multiple micro markets. This could be done based on the urban-rural divide, or based on the importance of cities. It is possible to create micro-markets where properties with similar characteristics can be combined. The value of all properties can also be compared to the base year. If the total value of all properties in 2010 was 100, then the index will reflect the current value in 2018. If the value is 160, there has been a 60% increase over the eight years. This method requires extensive calculations. To arrive at the final index value, several econometric formulas must be used. There is a possibility that the index could be biased by vested interests. Most of the time, however, the depicted value is accurate and fair. This method can be used in Scandinavia, the United Kingdom, India, and Switzerland. Similar principles inspired the creation of the National Housing Board Residex Index.
Real estate indices can be created using a variety of methods. The availability and accuracy data will determine the choice. This article also shows that real estate indices work differently from other indices.