An Evaluation of Correction Procedures for Appraisal-Based Real Estate Indices

Some authors claim that the volatilities of appraisal-based index returns are (downward) biased compared to the volatilities of their corresponding true market returns. They argue that professional appraisers are insecure about true market values of properties due to imperfect information. So in appraisal processes pure random errors as well as biases could occur, and value estimates fall apart from true market values. While estimates are performed on levels of single properties, appraisal-based indices for whole real estate markets are of interest for investors and economic experts. Since index values are aggregated from values of single properties, it is suspected that appraisal errors are transferred to index values. In the past, some authors suggested to correct (or “unsmooth”) appraisal-based indices from biases resulting from the behaviour of surveyors in appraisal processes. They claimed that the “corrected” index returns should meet the returns of true market values. This study shows that a variety of “corrected” returns time series can be gained by the different correction procedures and gives insights about the credibility of each of these correction procedures.