Adjusting for Non-Linear Age Effects in the Repeat Sales Index
AbstractA true constant quality real estate price index should measure the general change in price level free from any change in quality over time. In recent years, the repeat-sales method has been widely used to construct constant quality property price indices. Since buildings depreciate over time, a simple repeat-sales index would underestimate the growth in property prices. The major problem of controlling the effects of age constant in a repeat-sales model arises from the exact multicollinearity between the age variable and the time dummy variables. In this study, we derive a solution that is theoretically sound and practical by allowing the age effects to be non-linear. In case of leasehold properties, we further incorporated interest rates into the model because the effects of age on real estate prices depend theoretically on interest rates. A sample of residential units in Hong Kong sold more than once from Quarter 2 of 1991 to Quarter 1 of 2001 (more than 11,000 repeat sales pairs) are used for the empirical analysis. Copyright Springer Science + Business Media, Inc. 2005
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Bibliographic InfoArticle provided by Springer in its journal The Journal of Real Estate Finance and Economics.
Volume (Year): 31 (2005)
Issue (Month): 2 (September)
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Web page: http://www.springerlink.com/link.asp?id=102945
age effects; depreciation; duration; multicollinearity; repeat-sales index;
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