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Australian House Prices: A Comparison of Hedonic and Repeat-sales Measures

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  • James Hansen

    (Reserve Bank of Australia)

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    Abstract

    House prices are intrinsically difficult to measure due to changes in the composition of properties sold through time and changes in the quality of housing. I provide an overview of the theoretical nature of these issues and consider how regression-based measures of house prices – hedonic and repeat-sales measures – can control for compositional and quality change. I then explore whether these regression-based alternatives can provide accurate estimates of pure house price changes in the Australian context. Using unit record data for Australia’s three largest cities – Sydney, Melbourne and Brisbane – between 1993 and 2005, the results suggest that the two regression-based approaches provide similar estimates of the pure price change in housing. The measures are comparable in terms of statistical fit, with around half of the variation in prices growth (for those houses sold more than once) explained. The regression-based measures also produce similar estimates of pure price changes to those obtained by a mix-adjusted measure. However, all three measures behave quite differently from a simple median, implying that compositional change matters empirically. These results confirm that regression-based measures are likely to be a useful analytical tool when measuring pure house price changes in Australia.

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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2006-03.

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    Date of creation: May 2006
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    Handle: RePEc:rba:rbardp:rdp2006-03

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    Keywords: house prices; hedonic; repeat-sales;

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    1. Meese, Richard A & Wallace, Nancy E, 1997. "The Construction of Residential Housing Price Indices: A Comparison of Repeat-Sales, Hedonic-Regression and Hybrid Approaches," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 51-73, Jan.-Marc.
    2. Thomas G. Thibodeau, 2003. "Marking Single-Family Property Values to Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(1), pages 1-22, 03.
    3. Goetzmann, William N & Spiegel, Matthew, 1995. "Non-temporal Components of Residential Real Estate Appreciation," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 199-206, February.
    4. Karl E. Case & Robert J. Shiller, 1987. "Prices of Single Family Homes Since 1970: New Indexes for Four Cities," NBER Working Papers 2393, National Bureau of Economic Research, Inc.
    5. Robert J. Shiller, 1992. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Cowles Foundation Discussion Papers 1036, Cowles Foundation for Research in Economics, Yale University.
    6. Jonathan H. Mark & Michael A. Goldberg, 1984. "Alternative Housing Price Indices: An Evaluation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(1), pages 30-49.
    7. Goetzmann, W.N., 1990. "The Accuracy Of Real Estimate Indices: Repeat Sale Estimators," Papers fb-_90-17, Columbia - Graduate School of Business.
    8. Crone, Theodore M. & Voith, Richard P., 1992. "Estimating house price appreciation: A comparison of methods," Journal of Housing Economics, Elsevier, vol. 2(4), pages 324-338, December.
    9. 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.
    10. Case, Bradford & Quigley, John M, 1991. "The Dynamics of Real Estate Prices," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 50-58, February.
    11. Goodman, Allen C. & Thibodeau, Thomas G., 2003. "Housing market segmentation and hedonic prediction accuracy," Journal of Housing Economics, Elsevier, vol. 12(3), pages 181-201, September.
    12. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    13. Robert J. Shiller, 1991. "Arithmetic Repeat Sales Price Estimators," Cowles Foundation Discussion Papers 971, Cowles Foundation for Research in Economics, Yale University.
    14. Dale-Johnson, David, 1982. "An alternative approach to housing market segmentation using hedonic price data," Journal of Urban Economics, Elsevier, vol. 11(3), pages 311-332, May.
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    Cited by:
    1. Robert J. Hill & Daniel Melser & Iqbal Syed, 2009. "Measuring a Boom and Bust: The Sydney Housing Market 2001-2006," Discussion Papers 2009-08, School of Economics, The University of New South Wales.
    2. Nalini Prasad & Anthony Richards, 2006. "Measuring Housing Price Growth – Using Stratification to Improve Median-based Measures," RBA Research Discussion Papers rdp2006-04, Reserve Bank of Australia.
    3. Luci Ellis, 2006. "Housing and Housing Finance: The View from Australia and Beyond," RBA Research Discussion Papers rdp2006-12, Reserve Bank of Australia.

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