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House Prices and Replacement Cost: A Micro-Level Analysis

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Author Info
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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Publisher 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
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Handle: RePEc:hum:wpaper:sfb649dp2008-013

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Related research
Keywords: Tobin's Q building depreciation prediction accuracy

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
R31 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets

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  3. 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, vol. 10(4), pages 467-70, October.
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    Other versions:
  6. Russell Davidson & James G. MacKinnon, 1985. "Heteroskedasticity-Robust Tests in Regression Directions," Working Papers 616, Queen's University, Department of Economics. [Downloadable!]
  7. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August. [Downloadable!] (restricted)
  8. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
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  10. Clapp, John M. & Giaccotto, Carmelo, 1998. "Residential Hedonic Models: A Rational Expectations Approach to Age Effects," Journal of Urban Economics, Elsevier, vol. 44(3), pages 415-437, November. [Downloadable!] (restricted)
  11. Jud, G Donald & Winkler, Daniel T, 2003. "The Q Theory of Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 379-92, November. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
    Other versions:
  14. MacKinnon, J G, 1989. "Heteroskedasticity-Robust Tests for Structural Change," Empirical Economics, Springer, vol. 14(2), pages 77-92.
    Other versions:
  15. DiPasquale, Denise, 1999. "Why Don't We Know More about Housing Supply?," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 9-23, January. [Downloadable!] (restricted)
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This page was last updated on 2008-7-22.

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