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Comparing House Prices Across Regions and Time: An Hedonic Approach

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Author Info
Robert J. Hill () (School of Economics, The University of New South Wales)
Daniel Melser () (Moody’s Economy.Com)

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Abstract

Panel hedonic comparisons can be made using the region-time-dummy method. This method is a natural extension of the well known time-dummy and region-dummy methods which have been used extensively in the hedonic literature. We show that these methods are all affected by substitution bias, which can seriously distort their results. We propose an alternative approach that is free of substitution bias which builds up panel comparisons from bilateral building blocks using the hedonic imputation method. This approach is very flexible. We consider a number of variants on this method, all of which are likely to be improvements on the unconstrained region-time-dummy method. We illustrate our findings using data for 14 regions in Sydney over a six year period. We find clear evidence of bias in the region-time-dummy results as well as in simple average measures such as the median that fail to adjust for quality change. For these reasons we favor the hedonic imputations approach.

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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2007-33.

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Length: 32 pages
Date of creation: Nov 2007
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Handle: RePEc:swe:wpaper:2007-33

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Related research
Keywords: Hedonic regression Quality adjustment Housing Price index Substitution bias Multilateral indexes

Find related papers by JEL classification:
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
R31 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets

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  1. Kees Jan Van Garderen & Chandra Shah, 2002. "Exact interpretation of dummy variables in semilogarithmic equations," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 149-159, June. [Downloadable!] (restricted)
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    Other versions:
  3. Englund, Peter & Quigley, John M. & Redfearn, Christian L., 1998. "Improved Price Indexes for Real Estate: Measuring the Course of Swedish Housing Prices," Journal of Urban Economics, Elsevier, vol. 44(2), pages 171-196, September. [Downloadable!] (restricted)
  4. Hill, Robert J, 1997. "A Taxonomy of Multilateral Methods for Making International Comparisons of Prices and Quantities," Review of Income and Wealth, Blackwell Publishing, vol. 43(1), pages 49-69, March.
  5. Carlos Martins-Filho & Okmyung Bin, 2005. "Estimation of hedonic price functions via additive nonparametric regression," Empirical Economics, Springer, vol. 30(1), pages 93-114, January. [Downloadable!] (restricted)
    Other versions:
  6. 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.. [Downloadable!] (restricted)
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  12. Mick Silver & Saeed Heravi & W. E. Diewert, 2007. "Hedonic Imputation versus Time Dummy Hedonic Indexes," IMF Working Papers 07/234, International Monetary Fund. [Downloadable!]
    Other versions:
  13. Hill, Robert J., 2000. "Measuring substitution bias in international comparisons based on additive purchasing power parity methods," European Economic Review, Elsevier, vol. 44(1), pages 145-162, January. [Downloadable!] (restricted)
  14. Dowrick, Steve & Quiggin, John, 1997. "True Measures of GDP and Convergence," American Economic Review, American Economic Association, vol. 87(1), pages 41-64, March. [Downloadable!] (restricted)
  15. Shiller, Robert J, 1993. " Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, vol. 48(3), pages 911-31, July. [Downloadable!] (restricted)
  16. Ariel Pakes, 2003. "A Reconsideration of Hedonic Price Indexes with an Application to PC's," American Economic Review, American Economic Association, vol. 93(5), pages 1578-1596, December. [Downloadable!] (restricted)
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