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Price Discovery in Time and Space: The Course of Condominium Prices in Singapore

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Min Hwang (University of California, Berkeley)
John Quigley (University of California, Berkeley)

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Abstract

There is increasing evidence that aggregate housing prices are predictable. Despite this, a random walk in time and independence in space are two maintained hypotheses in most empirical models of housing price measurement. This paper examines the price discovery process in individual dwellings over time and space by relaxing both assumptions, using a unique body of data from the Singapore private condominium market. We develop a model that tests directly the hypotheses that the prices of individual dwellings follow a random walk over time and that the price of an individual dwelling is independent of the price of a neighboring dwelling. The model is general enough to include other widely used models for housing price determination as special cases. The empirical results clearly support mean reversion in housing prices and also diffusion of innovations over space. We find that serial and spatial correlation "matter" in the computation of price indices and the estimation of investor returns. This predictability may suggest that excess returns are possible. We use the monthly price series derived from condominium sales to investigate this issue. When aggregate returns are computed from models that assume a random walk and spatial independence, we find that they are strongly autocorrelated. When returns are calculated from more general models that permit mean reversion, the estimated autocorrelation in investment returns is reduced. Finally, when they are calculated from models permitting mean reversion and spatial autocorrelation, predictability in investment returns is completely absent.

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Paper provided by Berkeley Program on Housing and Urban Policy in its series Berkeley Program on Housing and Urban Policy, Working Paper Series with number 1039.

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Date of creation: 27 Jun 2006
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Handle: RePEc:cdl:bphupl:1039

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  1. Englund, Peter & Gordon, Tracy M. & Quigley, John M., 1999. "The Valuation of Real Capital: A Random Walk down Kungsgatan," Journal of Housing Economics, Elsevier, vol. 8(3), pages 205-216, September. [Downloadable!] (restricted)
  2. Guntermann, Karl L & Norrbin, Stefan C, 1991. "Empirical Tests of Real Estate Market Efficiency," The Journal of Real Estate Finance and Economics, Springer, vol. 4(3), pages 297-313, September.
  3. Basu, Sabyasachi & Thibodeau, Thomas G, 1998. "Analysis of Spatial Autocorrelation in House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 61-85, July. [Downloadable!] (restricted)
  4. Can, Ayse & Megbolugbe, Isaac, 1997. "Spatial Dependence and House Price Index Construction," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 203-22, Jan.-Marc. [Downloadable!] (restricted)
  5. Pace, R Kelley, et al, 1998. "Spatiotemporal Autoregressive Models of Neighborhood Effects," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 15-33, July. [Downloadable!] (restricted)
  6. William N. Goetzmann & Matthew I. Spiegel, 1997. "A Spatial Model of Housing Returns and Neighborhood Substitutability," Yale School of Management Working Papers ysm64, Yale School of Management. [Downloadable!]
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  7. Dubin, Robin A, 1998. "Predicting House Prices Using Multiple Listings Data," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 35-59, July. [Downloadable!] (restricted)
  8. Dean H. Gatzlaff, 1994. "Excess Returns, Inflation and the Efficiency of the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(4), pages 553-581. [Downloadable!] (restricted)
  9. Karl E. Case & Robert J. Shiller, 1987. "Prices of Single Family Homes Since 1970: New Indexes for Four Cities," Cowles Foundation Discussion Papers 851, Cowles Foundation, Yale University. [Downloadable!]
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  10. Quan, Daniel C & Quigley, John M, 1991. "Price Formation and the Appraisal Function in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 127-46, June.
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  1. Charles Ka Yui Leung, 2005. "Equilibrium Correlation of Asset Price and Return," Discussion Papers 00017, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
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  2. Erik Hjalmarsson & Randi Hjalmarsson, 2006. "Efficiency in housing markets: do home buyers know how to discount?," International Finance Discussion Papers 879, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Hjalmarsson, Erik & Hjalmarsson, Randi, 2006. "Efficiency In Housing Markets: Do Home Buyers Know How To Discount?," Working Papers in Economics 232, Göteborg University, Department of Economics. [Downloadable!]
  4. Min Hwang & John Quigley, 2006. "Selectivity, Quality Adjustment and Mean Reversion in the Measurement of House Values," Berkeley Program on Housing and Urban Policy, Working Paper Series 1046, Berkeley Program on Housing and Urban Policy. [Downloadable!]
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