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Separating the Age Effect from a Repeat Sales Index: Land and Structure Decomposition

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  • Wong, SK
  • Chau, KW
  • Karato, K
  • Shimizu, Chihiro

Abstract

Since real estate is heterogeneous and infrequently traded, the repeat sales model has become a popular method to estimate a real estate price index. However, the model fails to adjust for depreciation, as age and time between sales have an exact linear relationship. This paper proposes a new method to estimate an age-adjusted repeat sales index by decomposing property value into land and structure components. As depreciation is more relevant to the structure than land, the property’s depreciation rate should depend on the relative size of land and structure. The larger the land component, the lower is the depreciation rate of the property. Based on housing transactions data from Hong Kong and Tokyo, we find that Hong Kong has a higher depreciation rate (assuming a fixed structure-to-property value ratio), while the resulting age adjustment is larger in Tokyo because its structure component has grown larger from the first to second sales.

Suggested Citation

  • Wong, SK & Chau, KW & Karato, K & Shimizu, Chihiro, 2013. "Separating the Age Effect from a Repeat Sales Index: Land and Structure Decomposition," HIT-REFINED Working Paper Series 5, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:remfce:5
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/26023/wp005.pdf
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    References listed on IDEAS

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    1. Liu, Guiwen & Chen, Sijing & Gu, Jianping, 2019. "Urban renewal simulation with spatial, economic and policy dynamics: The rent-gap theory-based model and the case study of Chongqing," Land Use Policy, Elsevier, vol. 86(C), pages 238-252.

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