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A house price index will normally be influenced to a greater extent by the higher priced end than, for instance, the lower end former black townships, because traditionally township units are not traded very often, as the lower income population generally displays lower mobility.

But a further practical problem is that as the property cycle unfolds, differing segments see transaction volumes rise and fall at faster or slower rates than others. As this occurs, that particular segment’s influence on the overall national price trend wanes or increases relative to other segments. We have a good example above in the form of the freehold 2 bedroom and less segment whose prices are plummeting, but this also reflects volumes of transactions having fallen at a faster rate than certain other segments.

Therefore, the slump in prices of this sub-segment will not be fully reflected in a simple average price index because its weighting in the index would be declining too.

To partly counter this, a change in the methodology used to compile the index has been made, in which we keep the weightings of the different room size segments at a constant weighting based on the average weighting of the past 5 years.

That may partially help, but one still cannot get away from the fact that there will be certain sub-segments within the weighted segments whose influence would be declining due to a faster rate of decline in volumes than the relevant over-riding segment’s average.

Therefore, in short, in a weakening market it is difficult to compile an index that fully reflects the extent of the weakness in the market, and the reality is that things are probably a little worse in real life.

A further factor to bear in mind is the normal supply and demand forces, and that as demand weakens the supply of stock on the market also at least partly adjusts in a downward fashion. This we can see happening in a number of ways.

Firstly, it is clear that development of new residential stock has been going slower in recent times, and if the building plans passed graph is anything to go by the slump is not over yet.

Many residents also pull back on investing in value adding renovations on their properties, and just as it is nigh impossible to capture surges in additions and alterations in the price during the boom times, so too it is not possible to capture the depreciation that may occur in some units when capital investments in housing slow.

Secondly, there’s also the matter of supply of existing stock coming into the secondary market, which thins as well in times like these.

Despite horror stories of a surge in bad mortgage debt, repossessions and distressed sales (and the levels have risen sharply), the reality is that the overwhelming majority of formal South African homeowners are not in financial trouble, and many potential sellers would choose not to sell at present in a very depressed market.

Then, finally, even amongst those selling in this thin market, agents estimate that 26% are selling due to financial stress, a significant number but still the minority. So even the majority of those who do have their houses on the market are not necessarily in a rush to take the first offer that comes their way.

Prices are, therefore, “downwardly sticky” to a certain extent. This is reflected in the Property Barometer survey which indicates that, although 88% of sellers are not realising their asking price, they’re not going down without a fight, and the average time on the market in the third quarter shot up dramatically from 14 weeks and 6 days to 20 weeks and 1 day, almost 5 months.

A house price index, therefore, can be used as a good trend indicator, but when interpreting the prices levels and inflation rates that are provided by such an index, one should always bear in mind the limitations of statistics such as these.

Editors Note: The FNB House Price Index is constructed* using the average value of housing transactions financed by FNB. In order to eliminate outliers from the data sample, transaction values must be above 70% of FNB Valuations Division’s valuation of the property but below 130%, while purchase prices recorded as above R10m.

In order to reduce the impact on the index of rapid short term changes in weightings of different property segments, due to relative shifts in transaction volumes, the weightings of the different market segments according to room number are kept constant at their 5-year average weighting. A statistical smoothing function is applied to the data.