A hedonic house price index in continuous time

Purpose: This paper develops a methodology to measure movements in housing markets accurately and timely by constructing a continuously estimated house price index. Design/methodology/approach: The continuous index, which is extracted from an additive model that includes the temporal as well as the locational effect as smooth functions, can be interpreted as an extension of the classical hedonic time-dummy method. The methodology is applied to housing sales from Sydney, Australia, between 2001 and 2011 and compared to three types of discrete indexes. Findings: Discrete indexes turn out to approach the continuously estimated index with decreasing period lengths but eventually become wiggly and unreliable due to too few observations per period. The continuous index, in contrast, is stable, has some favourable robustness properties and is more objective in several ways. Originality/value: The resulting index tracks movements in the housing market precisely and in “real-time” and is hence suited for monitoring and assessing housing markets. Since turbulence in housing markets is often a harbinger of financial crises, such monitoring tools support policy makers and investors in tailoring their decisions and reactions. Additionally, the index can be evaluated arbitrarily frequently and therefore is well suited for use in property derivatives.