A Machine Learning Approach to Price Indices: Applications in Commercial Real Estate

Felipe D. Calainho (), Alex M. Minne () and Marc K. Francke ()
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Felipe D. Calainho: Universiteit van Amsterdam
Alex M. Minne: University of Connecticut
Marc K. Francke: Universiteit van Amsterdam

The Journal of Real Estate Finance and Economics, 2024, vol. 68, issue 4, No 4, 624-653

Abstract: Abstract This article presents a model agnostic methodology for producing property price indices. The motivation to develop this methodology is to include non-linear and non-parametric models, such as Machine Learning (ML), in the pool of algorithms to produce price indices. The key innovation is the use of individual out-of-time prediction errors to measure price changes. The data used in this study consist of 29,998 commercial real estate transactions in New York, in the period 2000–2019. The results indicate that the prediction accuracy is higher for the ML models compared to linear models. On the other hand, ML algorithms depend more on the data used for calibration; they produce less stable results when applied to small samples and may exhibit estimation bias. Hence, measures to reduce or eliminate bias need to be implemented, taking into consideration the bias and variance trade-off.

Keywords: Commercial real estate; Price indices; Machine learning (search for similar items in EconPapers)
JEL-codes: C43 C51 R33 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09893-1

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