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Decoupling land values in residential property prices: smoothing methods for hedonic imputed price indices

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A property is a bundled good composed of an appreciating asset, land, and a depreciating asset, structure. This study proposes the use of a hedonic based unobserved components approach where land and structure are viewed as two additive components of the price. The underlying trend in each component is identified via mapping each component’s intrinsic hedonic characteristics and using their different dynamic behaviour. The estimation approach uses a modified form of the Kalman filter. One advantage of the estimation strategy is that the composition of sales at any given period do not lead to abrupt or volatile changes in the estimates of the components. The algorithm is simple to implement and we demonstrate, using three datasets representing different urban settings in two countries, that the method produces land value predictions comparable to the state valuer’s assessments, and price indices comparable to recently published alternatives that rely on exogenous non-market information to disentangle land values. Our monthly indices are smoother than the quarterly counterparts.

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File URL: http://www.uq.edu.au/economics/abstract/549.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 549.

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Date of creation: 10 Sep 2015
Handle: RePEc:qld:uq2004:549
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Web page: http://www.uq.edu.au/economics/
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  1. Alicia N. Rambaldi & Cameron S. Fletcher & Kerry Collins & Ryan R.J. McAllister, 2013. "Housing Shadow Prices in an Inundation-prone Suburb," Urban Studies, Urban Studies Journal Limited, vol. 50(9), pages 1889-1905, July.
  2. W. Erwin DIEWERT & Jan de HAAN & Rens HENDRIKS, 2011. "The Decomposition of a House Price Index into Land and Structures Components: A Hedonic Regression Approach," The Valuation Journal, National Association of Romanian Valuers, vol. 6(1), pages 58-105.
  3. W. Erwin Diewert & Jan de Haan & Rens Hendriks, 2015. "Hedonic Regressions and the Decomposition of a House Price Index into Land and Structure Components," Econometric Reviews, Taylor & Francis Journals, vol. 34(1-2), pages 106-126, February.
  4. Koopman, Siem Jan & Harvey, Andrew, 2003. "Computing observation weights for signal extraction and filtering," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1317-1333, May.
  5. Koop, Gary & Korobilis, Dimitris, 2013. "Large time-varying parameter VARs," Journal of Econometrics, Elsevier, vol. 177(2), pages 185-198.
  6. Andrew Harvey, 2011. "Modelling the Phillips curve with unobserved components," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 7-17.
  7. Stephen Malpezzi & Larry Ozanne & Thomas G. Thibodeau, 1987. "Microeconomic Estimates of Housing Depreciation," Land Economics, University of Wisconsin Press, vol. 63(4), pages 372-385.
  8. Komunjer, Ivana & Ng, Serena, 2014. "Measurement Errors In Dynamic Models," Econometric Theory, Cambridge University Press, vol. 30(01), pages 150-175, February.
  9. Eurostat, 2013. "Handbook on Residential Property Prices Indices," World Bank Publications, The World Bank, number 17280, September.
  10. Knight, John R. & Sirmans, C. F., 1996. "Depreciation, Maintenance, and Housing Prices," Journal of Housing Economics, Elsevier, vol. 5(4), pages 369-389, December.
  11. Andrew Harvey & Siem Jan Koopman, 2000. "Signal extraction and the formulation of unobserved components models," Econometrics Journal, Royal Economic Society, vol. 3(1), pages 84-107.
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