Price Indexes for Multi-Dwelling Properties in Sweden
Berg, Lennart, The Journal of Real Estate Research
Abstract The econometric test in this paper indicates that standard property and municipality attributes are important determinants of sales prices for multi-dwelling and commercial buildings (MDCBs) in Sweden. Spatial econometric techniques were used to determine that spatial specified regressions improved the models' explanatory power. The constant quality price for a model estimated with OLS is roughly one percentage point higher than for a model controlling for spatial autocorrelation. When the constant quality price trend is estimated on a yearly basis, there are hardly any differences between the estimated parameters, notwithstanding if all MDCBs are in the sample or if the sample is split into submarkets. However, estimating models with a quarterly constant quality price trend to some extent shows different price trends for the three submarkets.
Accurate measures of the price trend are crucial for understanding the behavior of the real estate market. A substantial literature exists on the measurements of prices for non-standard assets, such as real estate.1 Two major problems must be overcome in constructing this price index: the relative infrequency of sales of buildings and the heterogeneity in characteristics across building units. Simple price indexes based on mean prices of units sold in a certain period do not take into account the characteristics of the building sold. These indexes can thus not distinguish between movements in prices and changes in the composition of units sold from one period to the next.
The indexes compiled by Catella Property Management and Celexa Aberdeen Asset Management in Stockholm are examples of this type of simple price index for commercial real estate.2 The price index for commercial real estate compiled by Statistics Sweden, which is based on an average of the ratio of sales prices to assessed value, has certain features similar to a constant quality index, since the assessed value reflects the market value of the house at a specific point in time. Still, the weights in the Statistics Sweden's index are not constant over time. Years with more or less sales in urban or rural areas will change the weights in the index and probably create a bias in the price trend, since the price level and the appreciation rates differ substantially between different areas in Sweden.3
The accurate measurement of housing and real estate price trends is thus crucial for understanding market behavior. For example, investigations on the "efficiency" of the housing market crucially depend on specific techniques generating the price indexes used for measuring the returns to arbitrage. Models, which investigate the determinants of speculative bubbles in real estate, also rely on the techniques for measuring prices. Real estate markets have also become more integrated with financial markets and the computation of housing prices has become of great practical importance to investors choosing between portfolios composed of real estate securities and other assets.
Constructing a price index for financial assets that trade frequently and regularly is normally a straightforward exercise. In contrast, infrequent trading and the heterogeneity of real estate require an entirely different methodology. The dominant approaches for constructing price indexes are hedonic models, the repeat sales method and the hybrid models combining the two above mentioned models. Hedonic models take into account the heterogeneity of the estate by incorporating the physical and locational characteristic of the traded units. Using the hedonic and the hybrid approaches makes it possible to extract the price trend for a constant-quality house. The repeat sales method only considers properties that have been sold at least twice. Thus, heterogeneity problems will be minimized since at least two transaction prices on the same property are observed.
Quite a few studies have analyzed the determinants of prices on owner-occupied houses in Sweden, using the hedonic and the hybrid approach. …