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Coming of Age: Renovation Premiums in Housing Markets

Author

Listed:
  • Mari O. Mamre

    (Norwegian University of Life Sciences)

  • Dag Einar Sommervoll

    (Norwegian University of Life Sciences and NTNU Trondheim Business School)

Abstract

We rely on novel textual analysis of real estate listings and identify renovated dwellings in a dataset of Norwegian transactions to estimate the renovation premium in an urban housing market. The renovation premium is estimated in a hedonic framework by classical regression approaches and a random forest algorithm. The strength of the latter is that it allows for a more complex interplay between the renovation premium and explanatory variables. We estimate a significant positive renovation premium of 5–7 percent for renovated dwellings and a negative premium of 9–10 percent for unmaintained/neglected dwellings. These averages mask significant variations in these premiums over time, particularly, a counter-cyclical effect. Omitting renovation information also has implications for estimated short-term house price growth. Unmaintained dwellings tend to transact more in the fourth quarter, indicating that parts of the seasonal price variation reported in the literature are due to compositional variation with respect to renovation. This composition effect bias price movement estimates downward, if uncontrolled for, as unmaintained dwellings transact at significantly lower prices.

Suggested Citation

  • Mari O. Mamre & Dag Einar Sommervoll, 2024. "Coming of Age: Renovation Premiums in Housing Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 69(2), pages 307-342, August.
    • Handle: RePEc:kap:jrefec:v:69:y:2024:i:2:d:10.1007_s11146-022-09917-w
    DOI: 10.1007/s11146-022-09917-w
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    More about this item

    Keywords

    Renovation; Hedonic estimation; House price indexes; Real estate listings; Random forest;
    All these keywords.

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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