Structural and temporal changes in the housing market and hedonic housing price indices

Abstract

Purpose -An economic indicator faces two requirements. It should be reported in a timely manner and should not be significantly altered afterward to avoid erroneous messages. At the same time, it should reflect changing market conditions constantly and appropriately. These requirements are particularly challenging for housing price indices, since housing markets are subject to large temporal/seasonal changes and occasional structural changes. The purpose of this paper is to estimate a hedonic price index of condominiums of Tokyo, taking account of seasonal sample selection biases and structural changes in a way it enables us to report the index in a manner which is timely and not subject to change after reporting. Design/methodology/approach -The paper proposes an overlapping-period hedonic model (OPHM), in which a hedonic price index is calculated every month based on data in the ''window'' of a year ending this month (this month and previous 11 months). It also estimates standard hedonic housing price indexes under alternative assumptions: no structural change (''structurally restricted'': restricted hedonic model) and different structure for every month (''structurally unrestricted'': unrestricted hedonic model). Findings -Results suggest that the structure of the housing market, including seasonality, changes over time, and these changes occur continuously over time. It is also demonstrated that structurally restricted indices that do not account for structural changes involve a large time lag compared with indices that do account for structural changes during periods with significant price fluctuations. Social implications -Following the financial crisis triggered by the US housing market, housing price index guidelines are currently being developed, with the United Nations, International Monetary Fund, and Organization for Economic Co-operation and Development leading the way. These guidelines recommend that indices be estimated based on the hedonic method. We believe that the hedonic method proposed here will serve as a reference for countries that develop hedonic method-based housing price indices in future. Originality/value -In the many studies involving conventional housing price indices, whether those using the repeat-sales method or hedonic method, there are few that have analyzed the problem of market structural changes. This paper is the first to construct a large database and systematically estimate the effect that changes in market structure have on housing price indices.

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