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

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  • Hwang, Min
  • Quigley, John M.

Abstract

A random walk in time and independence in space are maintained hypotheses in traditional empirical models of housing prices. However, there is increasing evidence in the context of hedonic models that housing prices are predictable over time and space. This paper examines the price discovery process in individual dwellings by relaxing both assumptions, using a unique body of data from the Singapore private condominium market in a repeat sales framework. We develop a formal 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 empirical results clearly support mean reversion in housing prices and also diffusion of innovations over space. This predictability may suggest that excess returns are possible. When aggregate returns are computed from models that assume a random walk and spatial independence, we find that they are strongly autocorrelated. However, when they are calculated from models permitting mean reversion and spatial autocorrelation, predictability in investment returns is completely absent. Despite this, an extensive simulation of investor performance, over different time horizons and with different investment rules, indicates quite clearly that recognition of the spatial and autocorrelated nature of prices substantially improves investor returns. The magnitude of deviations from standard models of price dynamics are small, but their economic implications are quite large in the housing market.

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Bibliographic Info

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 qt1wn5v55d.

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Date of creation: 13 Sep 2007
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Handle: RePEc:cdl:bphupl:qt1wn5v55d

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Keywords: house price innovations; excess returns; housing investment; Social and Behavioral Sciences;

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Cited by:
  1. Charles Ka Yui Leung, 2005. "Equilibrium Correlation of Asset Price and Return," Departmental Working Papers _175, Chinese University of Hong Kong, Department of Economics.
  2. Hua Sun & Yong Tu & Shi-Ming Yu, 2005. "A Spatio-Temporal Autoregressive Model for Multi-Unit Residential Market Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 31(2), pages 155-187, September.
  3. 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.).
  4. Hwang, Min & Quigley, John M., 2003. "Selectivity, Quality Adjustment and Mean Reversion in the Measurement of House Values," Berkeley Program on Housing and Urban Policy, Working Paper Series qt4045q0v3, Berkeley Program on Housing and Urban Policy.
  5. Hjalmarsson, Erik & Hjalmarsson, Randi, 2009. "Efficiency in housing markets: Which home buyers know how to discount?," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2150-2163, November.

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