RDP 9109: Estimates of Private Sector Wealth 5. An Index of Asset Prices

Recent work on compiling an asset price index has been carried out at the Treasury based on the private wealth series used in the NIF10 model. This index is restricted to three asset classes (dwellings, commercial property and equities) due to the limited availability of market price data for the other asset classes. This section derives a similar asset price index based on the wealth estimates presented in this paper.^[18]

The asset price index constructed here is limited to dwellings and business assets. The weights (calculated in 1989/90) are 59 per cent for dwellings and 41 per cent for business assets. Four components of business assets are used in calculating the index; equipment and inventories, non-dwelling construction, rural and ownership of overseas assets.^[19] For the purposes of constructing the index, it is assumed that an index of equity prices captures movements in wealth held in all equipment and inventories, in one half of the NDC held outside the banking, finance and property sector and in overseas assets. Wealth held in NDC by the banking, finance and property sector and in the other half of that held outside this sector is approximated by an index of Sydney CBD commercial property prices.^[20] Rural wealth is approximated by an index of rural land prices.^[21]

The weights attached to the equity index, the commercial property index and the index of rural land prices in calculating the index of business wealth, are 62 per cent, 19 per cent and 19 per cent respectively. This gives them weightings of 25 per cent, 8 per cent and 8 per cent respectively in the overall index. Table 6 shows the weights used in calculating the asset price index here and compares them to those used by the Treasury.^[22]

As was highlighted in the previous section, a feature of the Treasury estimates is the large contribution of dwelling wealth to total wealth. This means that dwelling prices carry a weight of 80 per cent in the Treasury index compared to 59 per cent in the index in this study. Equities carry a much higher weight in the index in this study, commercial property a lower weight and a fourth component, an index of rural land prices, which is not present in the Treasury index, is included with a weight of 8 per cent.

Chart 4 plots the asset price index and its components, compared with the Consumer Price Index. The index is plotted up until the March quarter 1991.^[23] The asset price index and its components are set out in Table 7.

Asset price growth began to accelerate in mid-1983 and apart from the fall caused by the stock market crash in 1987, it continued until late-1989. The acceleration in asset prices began on the equity market. The rapid growth in commercial property prices began in 1986. The acceleration in dwelling prices at the beginning of 1988 and the continued rise in commercial property prices offset all but the initial impact of the stock market fall on the growth in the asset price index. The growth in the index came to an end in late 1989. Between the December quarter 1989 and the March quarter 1991 the index fell by 7 per cent.

Footnotes

The index calculated here is a simple fixed weight average. It can be written as,

View MathML

where W_i is the weight attached to the i^th asset class (calculated in 1989/90) and P^I_i,t is the price index associated with the i^th asset class in period t. [18]

In calculating the weights in the business asset index, overseas ownership of Australian assets was ignored as it was not clear which components this should be deducted from. [19]

There is a question as to whether non-dwelling construction should be approximated by commercial property prices or equity prices. Listed companies which own the property are valued by equity prices. However, because unlisted companies also own a significant amount of property, it was decided to use a commercial property price index separately. [20]

The sources for the components of the asset price index are as follows: Equity prices – all ordinaries index
Commercial property prices – Sydney CBD Capital Value (Series 1) from Jones Lang Wootton.
Dwelling prices – the price series derived from CBA/HIA and REIA data as set out in Table 1.
Rural land prices – constructed from data from the N.S.W. Valuer-General's Department. [21]

See Urbanski (1990). [22]

Data on the rural land price index is only available up until June 1990. It is assumed that it has remained at its June 1990 level over the three quarters to March 1991. In reality, it is likely that rural land values have fallen over this period. This would depress the asset price index further. [23]