Adjusting for Non-Linear Age Effects in the Repeat Sales Index

K. Chau (), S. Wong and C. Yiu

The Journal of Real Estate Finance and Economics, 2005, vol. 31, issue 2, 137-153

Abstract: A true constant quality real estate price index should measure the general change in price level free from any change in quality over time. In recent years, the repeat-sales method has been widely used to construct constant quality property price indices. Since buildings depreciate over time, a simple repeat-sales index would underestimate the growth in property prices. The major problem of controlling the effects of age constant in a repeat-sales model arises from the exact multicollinearity between the age variable and the time dummy variables. In this study, we derive a solution that is theoretically sound and practical by allowing the age effects to be non-linear. In case of leasehold properties, we further incorporated interest rates into the model because the effects of age on real estate prices depend theoretically on interest rates. A sample of residential units in Hong Kong sold more than once from Quarter 2 of 1991 to Quarter 1 of 2001 (more than 11,000 repeat sales pairs) are used for the empirical analysis. Copyright Springer Science + Business Media, Inc. 2005

Keywords: age effects; depreciation; duration; multicollinearity; repeat-sales index (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11146-005-1369-6

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