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House Prices and Replacement Cost: A Micro-Level Analysis

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  • Rainer Schulz
  • Axel Werwatz

Abstract

According to housing investment models, house prices and replacement cost should have an equilibrating relationship. Previous empirical work mainly based on aggregate-level data has found only little evidence of such a relationship. By using a unique data set, covering transactions of single-family houses over a 25 years period, we establish strong support for the relationship at the micro level. In the time series context, we find that new house prices and replacement cost align quickly after a shock. In the cross-sectional context, we find prices of old houses and replacement cost are closely related once building depreciation has been taken into account. As to be expected from these results, replacement cost information also proves to be useful for the prediction of future house prices.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-013.

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Length: 45 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-013

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Keywords: Tobin's Q; building depreciation; prediction accuracy;

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  1. DiPasquale, Denise, 1999. "Why Don't We Know More about Housing Supply?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 18(1), pages 9-23, January.
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  13. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January.
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  15. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(4), pages 718-40, August.
  16. Perron, Pierre & Vogelsang, Timothy J, 1992. "Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(4), pages 467-70, October.
  17. Somerville, C Tsuriel, 1999. "Residential Construction Costs and the Supply of New Housing: Endogeneity and Bias in Construction Cost Indexes," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 18(1), pages 43-62, January.
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