It Is Not a Trend of Transacted Price (to be precise)
The Property Price Index (PPI) is a trend of the weighted moving average of the median transacted price. Let me illustrate its computation for easy understanding.
- First, find the median transacted price for each day
- Second, compute the average of the median price from 12 consecutive days. This will be 1 point on PPI for the 12th day
- Then for the 13th day, drop the median for day 1 and include the 13th median to calculate the moving average. Here is the 2nd point on PPI for the 13th This is what we call the moving averages where we move the 12 points of median one day at a time
Note that the actual formulation has different weights for the 12 medians. By putting more weight on the more recent days will provide a more responsive PPI. The actual weight ratio is not published but we do know it is revised every 3 years.
It Removes Deviation
Just like any other smoothing indicators, a moving average or regression has the characteristic of removing noises which give a good representation of the general property trend to the public. See the following chart; let’s assume a sharp drop of transacted price has occurred due to more tightened policies on day 6, the PPI will only start to show significant drop on day 8 and will only match up on day 17.
But wait a minute, we all know that profit comes from ‘buy low, sell high’, but how are we going to do that when we are only looking at the average. You will end up buying average and selling average which effectively gives you no profits. A good investor in real estate knows very well to take publicly available data with a pinch of salt.
PPI Lacks Behind the Actual Pricing
Another important characteristic of an index trend is the lacking effect whenever there is a change in direction. This inertia is due to the magnitude from the existing data set which will need a few time periods before the any new median points of different direction to cause a change in direction of the weighted average. See the chart below, a median price peak occurs on day 3 and the peak in PPI will only show up on day 11.
Imagine how much time would have been lost if you were to look at PPI instead of the actual transacted price?
What Is a Better Alternative?
If you would like to have a better perspective on the actual transacted price chart to make a well informed decision, do check out the edge property.
Click “Research” and key in the Condo project or HDB block that you are interested in and you should see a actual price trends chart at the bottom of the page.
All in all, the index curve has its limitation to be a handy tool for making purchase decision, savvy investors and home owners have to look beyond the averages. “Buy low, sell high”