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Adjusting for Non-Linear Age Effects in the Repeat Sales Index

  • K. Chau

    ()

  • S. Wong
  • C. Yiu
Registered author(s):

    A true constant quality real estate price index should measure the general change in price level free from any change in quality over time. In recent years, the repeat-sales method has been widely used to construct constant quality property price indices. Since buildings depreciate over time, a simple repeat-sales index would underestimate the growth in property prices. The major problem of controlling the effects of age constant in a repeat-sales model arises from the exact multicollinearity between the age variable and the time dummy variables. In this study, we derive a solution that is theoretically sound and practical by allowing the age effects to be non-linear. In case of leasehold properties, we further incorporated interest rates into the model because the effects of age on real estate prices depend theoretically on interest rates. A sample of residential units in Hong Kong sold more than once from Quarter 2 of 1991 to Quarter 1 of 2001 (more than 11,000 repeat sales pairs) are used for the empirical analysis. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11146-005-1369-6
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    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 31 (2005)
    Issue (Month): 2 (September)
    Pages: 137-153

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    Handle: RePEc:kap:jrefec:v:31:y:2005:i:2:p:137-153
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