Property Price Indices
9 important questions on Property Price Indices
Why do we need property price indices?
- Research purposes: better understanding of the property market
- Statistical agencies: construction of consumer price index
- Banks: actual liquidation value compared to mortgage or individual house basis
- Property owners
- Investment: Holding period returns (risk and return)
Different indices produce different graphics, what are the two main reasons for the differences in indices?
- Data
- Methodology: NVM uses simple statistics, Kadaster uses sale price appraisal ratios, Ortec uses Repeat sales, and ABF uses Hedonic prices
What is the CPPI and RPPI?
RPPI is the Residential Property Price Index
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What are the three main methods to determine indices?
- Appraisal-based indices, V is based on appraisals
- Transaction-based indices, V is based on transaction prices (Hedonic price models, Appraised value as a right-hand-side variable, Repeat sales models)
- Stock market based indices, V is based on stock market prices
What are the characteristics of appraisal based indices?
- Based on professional appraisals of individual property values
- Values are likely to be smoothed and lag true price level
- Values are based on previous appraisals and contemporaneous market prices
What are the advantages and disadvantages of appraisal based indices?
- For markets with low number of observations with heterogeneous properties appraisals are the only alternative
- Assessed values are periodically observed
- Assessed values can be used in a hedonic price model
Issues of appraisal based indices are:
- Appraisal errors
- Lagging and smoothing problems
- Client influence problems
- Appraisal based indices are not "constant age"
- International comparison is difficult because of different valuations practices
Which variables determine the hedonic price index?
Independent variables: property characteristics, location and time variables
What are the characteristics of the hedonic price models?
- Shows the price change of the average transacted property in the market
- Hedonic models can produce 'constant age' price indices
What are the advantages and hedonic price indices?
- Solid basis in economic and index theory
- Use all transactions for which characteristics are available
- Enables sorting of data into specialized indices
Issues:
- Data intensive
- Dependence on functional form and model specification
- Omitted variable bias; insufficient quality adjustment
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