By David Duffy

Thursday November 12 2009

THERE are a number of reasons why the perception of what is happening to house prices does not match what is recorded by statistical measures.

Firstly, people may be influenced by the price a nearby house has sold for. However, the price will reflect the characteristics of that house and could differ quite significantly from their own house.

Secondly, house price changes differ across geographic markets. For example, the Dublin market, which is widely reported, has experienced much greater house price falls than much of the rest of the country. Thirdly, price changes differ across sub-markets -- for example, the price of expensive properties has fallen more in recent times and these attract disproportionate media coverage, creating the impression that the rate of decline is the same for all dwellings.

Finally, coverage of the housing market tends to concentrate on large price changes, which are more newsworthy. Smaller changes in house prices tend not to get as much coverage.

The widespread belief that published measures, such as the permanent tsb/ESRI index, are somehow underestimating the true extent of the house price declines may also reflect a change in "base", when switching from calculating a price increase to calculating a price fall.

It is possible that this change in base leads people to misinterpret the current scale of decline relative to the increases reported in previous years. A move in prices from €400,000 to €500,000 represents an increase of 25pc. However, if prices were to fall from €500,000 to €400,000, then this change, which is of equal monetary value, represents a decline of 20pc.

The permanent tsb/ESRI index is constructed using the internationally recognised approach. The basic premise is that the price of a house is related to its characteristics. It is based on a large database of mortgages related to house sales for the whole country -- not just those reported for the Dublin area, which dominate media coverage.

THE actual index value published is a three-month moving average; this is good statistical practice when seeking to capture a trend. The measure of prices is taken at the time the mortgage is drawn down, ie, when the sale is actually closed. As a result, if prices are changing rapidly, this index lags any measure based on the date of the sale itself.

Statistics tell some home truths on the plunge in property values - Irish, Business - Independent.ie