Commercial Property Price Indexes: Problems of Sparse Data, Spatial Spillovers, and Weighting

Abstract

Transaction-price residential (house) and commercial property price indexes (RPPIs and CPPIs) have inherent problems of sparse data on heterogeneous properties, more so CPPIs. In an attempt to control for heterogeneity, (repeat-sales and hedonic) panel data regression frameworks are typically used for estimating overall price change. We address the problem of sparse data, demonstrate the need to include spatial price spillovers to remove bias, and propose an innovative approach to effectively weight regional CPPIs along with improvements to higher-level weighting systems. The study uses spatial panel regressions on granular CPPIs for the United States (US).

A hedonic assessment of the relative importance of structural, locational and neighbourhood factors on advertised rents in Malta

“…Cassel and Mendelsohn (1985) discuss the choice of functional forms in hedonic regressions, while Sirmans et al (2006) focus on the selection of explanatory variables in hedonic regressions. Another branch of the literature focused on spatial econometric modelling of property prices (Pace and LeSage, 2004; Coulson, 2008; de Haan and Diewert, 2013; Hill and Scholz, 2013; Silver and Graf, 2014). Subsequently, hedonic quality adjustments to house prices were popularised extensively (Straszheim, 1973, 1974; Wilhelmsson, 2009; Widlak and Tomczyk, 2010; Hill, 2013).…”

Commercial Property Price Indices and Indicators: Review and Discussion of Issues Raised in the CPPI Statistical Report of Eurostat (2017)

“…Another drawback is that appraisers are implicitly backward looking: They produce valuations that fit with their experience; they extrapolate from past transactions. The implication of this backward focus is that indices will tend to lag behind true market developments-and this lag can be substantial (see Cole et al, 1986;Fisher et al, 2007;Geltner, 2015;Diewert and Shimizu, 2017;Silver, 2019). This becomes a particular problem when appraisal-based CPPIs are used to try and detect market turning points.…”

“…• They suffer from composition bias, as only a small subgroup of commercial property is publicly traded. • They represent the current stock-market valuation of a property, but not its transaction value on the real estate market (Silver, 2019). • And they suffer from a tendency to overestimate returns.…”

“…In the US context, RCA is probably the most transparent, sometimes providing researchers with access to the source data (see, e.g. Silver and Graf, 2014). It would really help the CPPI literature move forward if more index providers would follow the lead of RCA.…”

How to Better Measure Hedonic Residential Property Price Indexes

“…60 The i th residual is inflated more (less) when i h is large (small) relative to the average of the i h , which is kn , see MacKinnon (2013). Finally, there is a very different approach due to Silver and Graf (2014) considered in the context of panel data for property price inflation. Included in the regression is a spatial autoregressive (SAR) term that aside from removing potential omitted-variable bias enables an innovative weighting system for the aggregate price change measure.…”