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

Siu Kei Wong (), K. W. Chau, K. Karato and C. Shimizu
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Siu Kei Wong: The University of Hong Kong
K. W. Chau: The University of Hong Kong
K. Karato: University of Toyama
C. Shimizu: Nihon University

The Journal of Real Estate Finance and Economics, 2018, vol. 57, issue 3, No 2, 366 pages

Abstract: Abstract Since real estate is heterogeneous and not all its quality attributes are observable, the repeat sales model pioneered by Bailey et al. (1963) has become one of the standard methods to estimate a constant-quality price index. The model, however, 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 the depreciation rate of the property. This new method is applied to property transactions in Hong Kong and Tokyo. Hong Kong is shown to have a higher depreciation rate based on a fixed structure-to-property value ratio, while the resulting age adjustment is larger in Tokyo because its land value has shrunken over time.

Keywords: Price index; Repeat sales; Depreciation; Land value; Structure value (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s11146-017-9631-2

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