This paper aims to develop a methodology to accurately and timely measure movements in housing markets by constructing a continuously estimated house price index.
The continuous index, which is extracted from an additive model that includes the temporal and the locational effects as smooth functions, can be interpreted as an extension of the classical hedonic time-dummy method. The methodology is applied to housing sales from Sydney, Australia, between 2001 and 2011, and compared to three types of discrete indexes.
Discrete indexes turn out to approach the continuously estimated index with decreasing period lengths but eventually become wiggly and unreliable because of fewer observations per period. The continuous index, in contrast, is stable, has favourable robustness properties and is more objective in several ways.
The resulting index tracks movements in the housing market precisely and in “real-time” and is hence suited for monitoring and assessing housing markets. Because turbulence in housing markets is often a harbinger of financial crises, such monitoring tools support policymakers and investors in tailoring their decisions and reactions. Additionally, the index can be evaluated arbitrarily frequently and therefore is well suited for use in property derivatives.
This project has benefited from funding from the Austrian National Bank (Jubiläumsfondsprojekt 14,947) and the JungforscherInnenfonds sponsored by the council of the University of Graz. The author thanks Australian Property Monitors for supplying the data used in this paper. This paper is based on the first chapter of the author's dissertation at University of Graz. A preliminary version was presented at the inaugural conference of the Society of Economic Measurement at the University of Chicago Booth School of Business in 2014 as well as the Annual Meeting of the Austrian Economic Association at the University of Klagenfurt in 2015. The author thanks her PhD supervisor Robert J. Hill for his great support as well as Jan de Haan, Robert Inklaar, Alicia Rambaldi , D.S. Prasada Rao, Michael Scholz and two anonymous referees for their valuable and helpful comments.
Waltl, S.R. (2016), "A hedonic house price index in continuous time", International Journal of Housing Markets and Analysis, Vol. 9 No. 4, pp. 648-670. https://doi.org/10.1108/IJHMA-10-2015-0066
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