Mind the data gap: commercial property prices for policy
The monitoring of real estate markets has become an essential part of the policymaker’s analytical framework, including that of central banks as well as macro- and microprudential supervisors. One key factor is that developments in both commercial and residential properties can significantly contribute to financial sector procyclicality with potentially severe implications for the real economy. In this context, the Data Gaps Initiative (DGI) endorsed by the G20 has been instrumental in recognising the usefulness of commercial property price indicators (CPPIs) for policy, especially in addressing the various financial stability issues highlighted during the 2007–09 Great Financial Crisis (GFC).
A number of sources can potentially be used to measure commercial property price developments. First and preferred are transaction records (official selling prices registered by land registries or tax authorities), although these are not always available. A second, often complementary, source is appraisals or valuations (estimated prices based on expert judgment, taking into account the general market situation, the characteristics of the property and its location). Finally, financial market indicators (for instance, the prices of funds investing mainly or solely in commercial property, such as real estate investment trusts (REITs)) can provide an indirect source, with good timeliness but limited coverage.
It is widely recognised that there is no single best source for the compilation of CPPIs. Moreover, and despite their relevance, CPPIs are scarce and not comparable between countries. Transactions are few in number and unrepresentative of the full stock of properties, especially during recessions, while market segments are heterogeneous. In addition, transaction records often lack information on the quantitative and qualitative characteristics of the underlying property, such as its size and major renovation work. Turning to appraisal-based data, these can certainly help to fill information gaps, but they also have drawbacks: valuations are carried out infrequently and may have a subjective element; and samples may be biased in terms of market segments (eg high-value properties). Lastly, financial market sources can provide almost real-time information, a key advantage over transaction and appraisal-based CPPIs, which run the risk of being lagged and of smoothing underlying developments. But, in many countries, the related markets appear to be too small, illiquid and unrepresentative of the overall commercial property sector.
As a result, CPPIs are published only in a handful of places. Moreover, while the aim should be to produce timely information on the value of property stocks, quality-adjusted price indices and associated structural indicators on commercial property markets, and with a quarterly frequency, few of the currently published indicators meet these objectives. In several countries, the infrequency of transactions and the heterogeneity of commercial properties have prevented the compilation of official, transaction-based and quality-adjusted statistics. In some cases, private commercial providers instead compile appraisal-based data sets, but these are often not available to the public. Furthermore, the lack of international compilation guidelines has so far hampered cross-country comparability.
