It's not difficult to understand the frenzied interest in the answer to this question.

For most home owners, their pile of bricks is the most expensive asset they'll ever own. For investors, they want to know how their investment is performing.

For would-be buyers, it's a key guide to whether they will ever be able to afford their property ownership dream.

For the Reserve Bank, rapidly rising home prices are a key consideration in deciding whether lower interest rates may do more harm than good, by inflating a property bubble.

And for politicians, home prices should act as scorecard of their success in ensuring the safe, secure and affordable shelter every citizen deserves.

But while it's not hard to understand interest in house prices, answering the question of how much homes are worth is a bit harder.

Of course, a home is worth the maximum of whatever a buyer is willing to pay for it. That, in turn, depends on the relative strength of demand for and supply of homes.

The biggest risk to home prices at any point is that home owners are forced into selling their homes en masse, most likely because of rising joblessness. That is what we're seeing unfold in Perth with the end of the mining boom.

In normal times, however, the supply of homes is quite flexible. Home owners who fear price falls can simply choose to stay put and not put their properties on the market. This acts as a cushion against price falls. This is happening in Sydney now, where turnover is particularly low.

So, at any time, the only possible information we have on home values is realised sale prices from home sales. While these account for only a tiny proportion of all housing, they must serve as the indicator of all home values.

Eventually, it is possible to know with complete certainty how much homes have sold for, when settlement documents are lodged with Valuer General departments in each state.

But this can take up to nine months.

For policymakers, it's important to have a more timely indicator of changes in house prices, so these must necessarily come from reports from real estate agents to media.

But it gets even more tricky.

One simple way of measuring price changes is just to take the median - or middle - value of all property sales from one period to the next.

But changes in the type of properties sold can dramatically affect results.

If five mansions in an expensive suburb sell in one month, and then five modest family homes in a regional area in the next month, the median home price would drop dramatically.

The Australian Bureau of Statistics' quarterly measure of property prices tries to overcome this by using a "stratification approach". The idea is to group similar properties together and measure those price changes and then get an average of all the different types of properties. In practice, this means treating homes in particular locations as similar. Ideally, you'd do it by suburb or street, but then you wouldn't have enough sales from one period to the next to make the sample size big enough.

The Domain Group - owned by Fairfax - uses a similar methodology for its price reports.

Another way to measure home prices is to look at repeat sales. This is the basis of the US Case Shiller series, which was a particularly poor indicator of price movements during the global financial crisis because it, by definition, couldn't measure changes in the large supply of new homes that were coming onto the market.

The other problem with the repeat sales method is that it give more weight to properties which are more frequently sold, such as apartments not family homes.

A company called Residex used to do this in Australia, but it was bought out by a company called CoreLogic.

Indeed, CoreLogic - an offshoot of a global property information company - looms large on the Aussie home price scene. The Reserve Bank buys its data, as does the ABS which uses it to compile its price indexes.

CoreLogic is the only source in Australia of a "hedonic" index of home values.

That's a pretty fancy word. Basically, the CoreLogic index takes data on property sales and tries to break down what portion of the sale value is due to various property features, such as number of bedrooms, bathrooms, a garage, a backyard and total property size.

No matter what type of properties are transacted, then, sale prices can be adjusted to remove the impact of differences in individual home features to give a purer measure of overall price changes.

The CoreLogic index is produced monthly, making it the most timely measure of house prices, and it is heavily relied upon by the Reserve Bank.

The Reserve Bank was critical of the measure last year, however, when it discovered CoreLogic had - without telling anyone - changed the way iteliminates extreme values from itssurvey: values which are either too high or too low.

Previously, sales below and above certain dollar figures were excluded. But, as prices rose, more properties were captured or pushed out. So in April to May, it switched to a new and better method. But the effect of the change was a one-off jump in prices that is still being reflected in inflated annual growth figures. It won't wash out until April or May this year.

Clearly, home prices have surged in Sydney and Melbourne recently, but all home price indicators need to be treated with caution.