At the beginning of this month, the Central Bureau of Statistics announced it was suspending publication of figures for sales of new housing units by contractors due to problems with the data. Now, two weeks later, the Bank of Israel is citing an additional problem in the Central Bureau of Statistics' measuring method - this time the figure for housing starts.
"An analysis conducted by Adi Finkelstein of the Bank of Israel Research Department examined the development of the quarterly estimates of housing starts since 2004. The examination showed that while typical initial economic estimates are generally revised at random (we cannot know in advance whether they will be revised upwards or downwards), the estimate of housing starts is consistently biased downwards to a significant extent," the Bank of Israel's announcement stated.
According to this analysis, the error is not negligible; the bias in the housing starts estimate averages no less than 10%. This is a substantial error, particular in a figure with such significance for the real estate industry and the economy as a whole. The Bank of Israel recommends that the Central Bureau of Statistics revise its method of measurement.
The Bank of Israel's study further states, "The figures for housing starts constitute an important element in Israel's economic picture, especially in a period in which housing occupies a central place in economic policy. If the real-time figures contain a downward bias, it affects policymakers and the public, which can affect the housing market.
"When the cumulative revisions in the housing start series in 2014-2015 were examined, it was found that the initial data had a systematic downward bias. This study found that the initial estimates could be corrected by using models that take into account the revisions in the data from previous quarters. These results require a more thorough test of the existing estimates and an examination of other statistical models for correcting the bias. Until that is done, as the Central Bureau of Statistics notes in its publications on housing starts, it is recommended that users of the data take care when they rely on the initial publication of the figures in question."
"The figure is liable to lose credibility"
The Bank of Israel Research Department goes on to say, "Housing starts, the construction stage in which the digging of the building’s foundations begins, are a critical link in the production chain of a housing unit. The estimate of the number of housing starts is a very important figure, which has attracted broad public interest in recent years in view of the increase in home prices… The high number of entities involved in the construction process (the Ministry of Construction and Housing, more than 100 local planning and building committees and hundreds of developers surveyed by phone) makes it difficult to gather data in real time, and leads to retroactive revisions in the quarterly figure."
The Bank of Israel also says that the retroactive revision of the data is not done at a short interval of one or two quarters, but at a longer one. "This figure is revised upwards mainly in the first year after publication, stabilizing after two years at a value that is about 10% higher on average. A breakdown by district shows that the problem exists in all districts, but is particularly marked in the data on the Tel Aviv and Haifa districts."
The Bank of Israel announcement is important for the real estate sector, on which housing starts figures have a strong effect. These figures also influence the expectations of buyers, contractors, and developers. The discovery of such a large bias is liable to affect not only the volume of construction in Israel, but also the behavior of buyers and the idea of a shortage, which has repeatedly pushed up housing prices in recent years.
The Bank of Israel also comments on the risk incurred by using inaccurate data. "The underestimate for housing starts incurs two risks. The first is that the figure is liable to lose credibility, and policymakers will stop using it. The second risk involves creating expectations among the public. If it is reported every quarter that housing starts have fallen significantly, it creates public expectations that the supply will drop in the coming years, and prices will rise."
A chain of failures
Another important point arising from the Bank of Israel's study involves the quality of the data published by the Ministry of Construction and Housing. One of the Central Bureau of Statistics' main sources in construction is the Ministry of Construction and Housing. According to the study, however, these figures are inaccurate: "A breakdown by developer shows that between 2009 and 2014, the Ministry of Construction and Housing revised the data on public development starts upward by about 28% on average. In contrast, the figures on private development starts were revised upward by about 10% on average. This shows that all the data are downward biased, but the administrative data from the Ministry of Construction and Housing are typically of low quality in relation to the figures from the private sector."
Only 10 days ago, it was reported that the Central Bureau of Statistics had unusually decided to postpone its regular publication of annual figures for the number of new housing units sold by contractors in Israel and figures for the demand for new housing. According to the Central Bureau of Statistics, the reason for the postponement was "a problem with the quality of the data received."
The Central Bureau of Statics admitted at that time, "Unfortunately, in some of the Central Bureau of Statistics' recent publications dealing with housing and construction, it was necessary to revise the initial figures, following new information obtained from these ministries as a result of late reporting, cancelation of transactions, duplicate recording, etc. Due to the attempt to improve the housing and construction data, the Central Bureau of Statistics has decided to cut down on the revision, and to wait for revised information. As a result, the data of publication will be postponed to a date that has not yet been determined."
The Bank of Israel is now warning about the poor quality of the data that the Central Bureau of Statistics receives.
The Bank of Israel study shows periods in which the difference between the initial reports for housing starts and the revised figures was over 13%. In numbers, this means hundreds of housing units on which construction had begun, but which were not included in the figures.
The study further emphasizes that the problem with the data does not lie in how the Central Bureau of Statistics presents them, but in their measurement. The many revisions also affect the annual figures for housing starts. For example, a figure published last year by the Central Bureau of Statistic for 2015 as a whole showed 47,700 building starts in Israel. The current figure for building starts during this year is 52,700.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 12, 2017
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