Working Paper: CEPR ID: DP3161
Authors: Olympia Bover; Pilar Velilla
Abstract: In this Paper we propose an alternative to traditional hedonics for estimating new multiunit housing inflation, adjusting for quality changes. By relying on the within-site variation we control in a very general way for unobserved housing characteristics using site-specific effects. Precise location, transport, traffic, closeness to services, or construction quality are some of the unobserved but typically relevant housing characteristics that may bias estimated house price inflation, even when using hedonic methods. We also estimate standard hedonic equations and compare the results to those obtained with the alternative hedonic equations with site dummies. Our dataset is fairly rich in observable housing characteristics but, nevertheless, the quality-adjusted house price evolution is quite different in some cases. The data cover the construction of new housing in some of the large Spanish cities and in the smaller towns on the outskirts of the capital during part of the 1990s.
Keywords: hedonic price indices; house prices; quality adjustment; site specific effects; unobservable characteristics
JEL Codes: C43; E31; O47; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| site characteristics (R53) | housing prices (R31) |
| unobserved characteristics (D80) | biased estimates of house price inflation (E31) |
| proposed method (C59) | more accurate measure of housing inflation (R31) |
| traditional hedonic methods (D11) | upward bias in price indices (C43) |
| quality-adjusted index (C43) | reliable evolution of house prices (R31) |
| unobserved characteristics (D80) | distort estimates of price indices (C43) |
| traditional hedonic indices (C43) | discrepancies in housing inflation estimates (R31) |