The Age–Period–Cohort Problem in Hedonic House Prices Models

Chung-Yim Yiu and Ka-Shing Cheung
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Chung-Yim Yiu: Department of Property, The University of Auckland, 12 Grafton Road, Auckland 1010, New Zealand
Ka-Shing Cheung: Department of Property, The University of Auckland, 12 Grafton Road, Auckland 1010, New Zealand

Econometrics, 2022, vol. 10, issue 1, 1-11

Abstract: The age–period–cohort problem has been studied for decades but without resolution. There have been many suggested solutions to make the three effects estimable, but these solutions mostly exploit non-linear specifications. Yet, these approaches may suffer from misspecification or omitted variable bias. This paper is a practical-oriented study with an aim to empirically disentangle age–period–cohort effects by providing external information on the actual depreciation of housing structure rather than taking age as a proxy. It is based on appraisals of the improvement values of properties in New Zealand to estimate the age-depreciation effect. This research method provides a novel means of solving the identification problem of the age, period, and cohort trilemma. Based on about half a million housing transactions from 1990 to 2019 in the Auckland Region of New Zealand, the results show that traditional hedonic prices models using age and time dummy variables can result, ceteris paribus , in unreasonable positive depreciation rates. The use of the improvement values model can help improve the accuracy of home value assessment and reduce estimation biases. This method also has important practical implications for property valuations.

Keywords: age–period–cohort problem; hedonic price models; multicollinearity; improvement values (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2022
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