Significant revisions in estimating housing starts (Hebrew)

  • The data on housing starts
    serve as an important input in formulating policy in the housing market, as
    well as in formulating monetary policy. 
    A Bank of Israel Research Department analysis shows that between 2004
    and 2014, the initial quarterly estimate of housing starts was biased downward
    by an average of about 10 percent.  The
    figure is revised upwards mainly during the first year after publication, and stabilizes
    after two years (8 quarterly publications).
  • Policy makers in the
    housing field are exposed to the initial estimate—and the broad public is
    exposed to it since in recent years it has gained wide media exposure.  They may therefore develop a misleading
    concept regarding activity in the construction industry.  Therefore, caution must be exercised when using
    the initial estimate, and resources should be invested in improving it.
  • Data collection depends
    on many entities dealing with construction initiation, approval and actual
    start, and some of these entities provide the Central Bureau of Statistics with
    only partial data.  This complex process
    makes it difficult to publish quality data in real time.
  • A statistical model for
    forecasting the revisions makes it possible to narrow the size of the average
    revision by at least one-third, and to formulate a forecast that is not biased
    in a particular direction—an estimate that is sometimes revised upward and
    sometimes downward.  This model relies on
    data that is known in real time (ex ante), and can be used to improve the
    estimate at the time of publication.

 

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, and is published on a
quarterly basis by the Central Bureau of Statistics (CBS).  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
CBS makes great effort to cleanse the administrative data that it receives from
the Ministry of Construction and Housing and from the developer surveys in real
time.  In addition, it uses a statistical
model to estimate missing data that it expects to receive in the future.

 

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.  This figure is revised upwards mainly in the
first year after publication, stabilizing after two years at a value that is
about 10 percent 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.  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 percent on average.  In contrast, the figures on private
development starts were revised upward by about 10 percent 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.

 

The
analysis also proposes a statistical model based on the revision patterns
between 2004 and 2015.  The model uses
the initial housing start estimates and their revisions to forecast the
expected revisions after four and eight quarters.  The results of the real time forecasting
exercise show that less conservative models can be proposed to estimate the
missing data, which will make it possible to reduce the size of the average
error by at least one-third and to formulate a forecast that is not biased in a
particular direction.

 

The
figure on the number of housing starts serves various government authorities in
estimating supply in the housing market and in formulating policy regarding the
need for government intervention in the construction industry.  The figure also serves the Bank of Israel in
the formulation of monetary policy.  Since
in most cases the estimate is revised upward retroactively, and in some cases,
estimates that showed a decline in the volume of housing starts were changed to
indicate an increase, it  may create an impression
that activity in the construction industry is slowing down or not expanding,
while in actuality the number of new homes has been in a moderate upward trend
over time.  This paper strengthens the
warning that the CBS attaches to its publications on housing starts and
provides the consumers of the data with the magnitude of the expected revisions
of the data.

Excerpt from the Fiscal Survey and collection of research issues: Significant revisions in estimating housing starts