HDB revises way it computes resale price index

THE Housing and Development Board (HDB) announced on Tuesday that it is switching the way it computes its resale price index (RPI) to a more robust method. This will take effect from the fourth quarter of this year.

Back-testing of the new approach shows that HDB resale prices fell by a bigger magnitude over the past three quarters. The RPI would have fallen 1.8 per cent in the third quarter this year, compared to 1.7 per cent using the older approach.

Besides expanding its data coverage to newer towns and flat models, HDB is switching the index methodology to the "stratified hedonic regression" model from the "stratification" method.

HDB says that the new method allows for quality control at the broader level. Housing units are heterogeneous and their quality differences have to be controlled in order to derive actual price changes.

Under the new method, HDB will first sort housing units by flat types, and then derive the price movement for each segment based on a formula that accounts for several housing attributes such as location, proximity to facilities or amenities, age or floor level. Even factors such as distance to MRT stations and primary schools are accounted for.

Previously under the stratification approach, HDB sorted housing units by flat types, models and regions and then derived the index by aggregating the mean prices of the segments, each weighted based on a 12-quarter moving average of transaction volumes.

HDB is now changing the index weighting from this 12-quarter moving average of transaction volumes to a five-quarter fixed weight of capital values. The weights will be revised every three years.

In addition, HDB is changing the base year of the index from the fourth quarter of 1998 to the first quarter of 2009.