Improved Price Index for Condominiums

This paper proposes a price index construction methodology that can increase the quality of price index data for condominiums in Sweden. Currently, officially published market price indexes for condominiums and houses in Sweden suffer from a number of shortcomings. Notably they do not control for quality, and they are based on dates when transfer of ownership of the home occurs, and not the contract date. Market coverage is yet another area that may cause problems for index construction, especially during times when the number of transactions is low, and when there exist a large number of brokers ñ the primary suppliers of data ñ that do not feed the system with sales information. We describe a new price index that controls for quality and reflect most recent price levels and changes. We also discuss the efforts we undertake in order to increase market coverage. With access to a unique database we estimate a price index with the improved methodology, and contrasts it to commonly used average price indexes. Naturally, there is a trade-off between control of quality, access to the most recent transactions, and market coverage on one hand, and ease of construction on the other hand. Therefore we also discuss current limitations of the improved methodology and how they may be solved in the future, such as problems with model specification with respect to different local market conditions, changing relationships over time, and the difficulty of obtaining attributes. Finally we discuss the potential value of an improved price index for the establishment of risk management instruments such as insurance and derivatives products for the housing market.