Improved price index for condominiums by Han-Suck Song a and Mats Wilhelmsson b a) Department of Real Estate Economics, Royal Institute of Technology (KTH), Stockholm, Sweden b) Centre for Banking and Finance (CEFIN), Royal Institute of Technology (KTH), Stockholm, Sweden Paper presented at the ERES 2009 conference, Stockholm June

Who presents the correct price information? 2 DN: March 12, 2009 DN: March 17, 2009

Why better apartment price index? – Economic indicator. – ”Underlying asset” in derivatives and insurance contracts. – More… 3

Construction of real estate price indexes Example of Index construction methods: Average prices Repeated-Sales (Case & Shiller) Hedonic price index (different alternatives) Date of sale: Contract date or deed date? 4 11 september 2015Confidential - Valueguard AB © 2009 All rights reserved

Date of Sale: contract date vs. deed date 5 Advertisement Open house Contract date Deed date Statistic Sweden S&P KTH/Valueguard, Mäklarstatistik On average 55 days

Case – Stockholm apartment (condominium) market January 2005 to January VariableDefinitionAverageStandard deviationMinMax PriceSEK Living areaSquare meters RoomsNumber of rooms FeeMonthly fee: SEK BalcDummy: Balcony FirstDummy: First floor TopDummy: Top floor Byear1Dummy: Before Byear2Dummy: Byear3Dummy: Byear4Dummy: Byear5Dummy: Byear6Dummy: After NewDummy: New building ElevDummy: Elevator DistanceDistance: Meters to city NEDummy: Northeast NWDummy: Northwest SWDummy: Southwest No. of observations32,380

X and Y Coordinates Distance to the “middle” Direction – Quadrants 7 NENW SWSE

Estimation procedure I Single hedonic price equtation Vs. Multiple hedonic price equation (Moving Windows Regression)

Moving Window Regression 9

Estimation procedure II Spatial hedonic price index Vs. Multiple hedonic price equation (Moving Windows Regression) – There is a presence of spatial dependency in our hedonic models. – However this seems not to spill over to the price index.

Spatial hedonic models 11

Result: Single hedonic price equation 12 VariableCoefficientt-valueVIF Constant Living area Rooms Fee Balc First Top Byear Byear Byear Byear Byear New Elev Dist Dist*NE Dist*NW Dist*SW NE NW SW No. of observations31390 R 2 -adj.8780 Expected signs Reasonable magnitude Statistical significant High explanatory power Expected signs Reasonable magnitude Statistical significant High explanatory power

Average price vs. Hedonic Index 13

Date of Sale: Contract date vs. Deed date 14 The difference in index as compared to figures above is due to different samples; not all observations with deed date have contract dates, and vice versa.

Conclusion – Date of sale important (contract date vs. deed date). – Among the many alternatives to estimate an apartment price index, estimating a single hedonic price eqationn seems sufficient. *Important to test for parameter heterogenity and spatial dependency. – Further work to improve quality of apartment price index: *Most important is to improve input of quality of inputs and number of attributes.

Specification Dependent variables: ln(price) Independent variables: – ln(area), ln(room), ln(fee) – First floor, top floor, floor level, no. of floors – Elevator, balcony – 6 periods – ln(distance), geographical direction – Administrative parish – … – Time dummies

Periods Six periods – Before and older – Before World War II – After post-war – ”Million programe” – Construction subsidies – After 1990Abolishment of the subsidy system

Specification Dependent variables: ln(price) Independent variables: – ln(area), ln(room), ln(fee) – First floor, top floor, floor level, no. of floors – Elevator, balcony – 6 periods – ln(distance), geographical direction – Administrative parish – … – Time dummies