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A method for combining transaction- and valuation-based data in a property price index
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.
(English)Article in journal (Other academic) Submitted
Abstract [en]

This paper presents a method for combining transaction- and valuation-based data in a property price index. The methodology is devised for a world where observable transaction prices can be used to construct a price index that constitutes a noisy, unbiased signal of the ”true” price index. It is furthermore assumed that valuations can be used to construct a market value index which does not contain noise but that suffers from so called appraisal ”smoothing”. The valuation-based index is thus assumed to lag the ”true” value index and exhibit lower volatility. The model of the valuation-based index follows Geltner (1993). By regressing the transaction-based index on the valuation-based index (contemporaneous and lagged one period) it is possible to filter out the noise in the observable price index thus estimating the ”true” price index. The method may be seen as a way of ”de-smoothing” a valuation-based index without knowing the smoothing parameter beforehand. The methodology may also be used as a way of estimating the smoothing parameter.

Keyword [en]
real estate, price index, smoothing, valuation, transaction
National Category
Economics
Identifiers
URN: urn:nbn:se:kth:diva-26950OAI: oai:DiVA.org:kth-26950DiVA: diva2:373127
Note
QS 20120328Available from: 2010-11-30 Created: 2010-11-30 Last updated: 2012-03-28Bibliographically approved
In thesis
1. Essays on lease and property valuation
Open this publication in new window or tab >>Essays on lease and property valuation
2010 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The first two papers in this dissertation discuss a fairly recently developed research field, Space Syntax, and how the findings in this field may be used to understand spatial economic patterns such as geographic distribution of market rents. Both papers use standard econometric methods to investigate the relationship between rents and the so called integration value developed within Space Syntax. The integration value may be understood as a measure of the accessibility of a certain location in a street network. The measure is constructed using tools from graph theory and uses the shape of the street network as its only input. The papers estimate hedonic models of office and retail leases from central Stockholm to test whether the integration value can help explain rents. A statistically significant effect of integration value on both office and retail rent is found. It appears as if Space Syntax adds important information to the understanding of intraurban rent patterns.

Illiquidity is a main feature of most property markets and market participants are therefore directed to property appraisals to obtain information about market values. The reliability of property appraisals is therefore an important research topic. The third paper studies the “rationality” of valuations by testing if capitalisation (cap) rates from individual discounted cash-flow (DCF) valuations are consistent with economic theory. Standard econometrics is used to study the variation in cap rates. For the most part the results support the hypothesis that appraisers are “rational” in the above mentioned sense.

Illiquidity of direct property also poses a problem when constructing property price indices.  Lack of price observations and heterogeneity among the few observations available is likely to introduce noise in price indices based on transactions. Valuations are therefore often used instead to construct indices. These indices however suffer from a bias due to so called “appraisal smoothing”. In the fourth paper it is shown that, given certain assumptions, one may filter out noise in a transaction-based price index by regressing it on a valuation-based index (contemporaneous and lagged one period). The procedure may in some circumstances improve pure valuation- or transaction-based indices.

Place, publisher, year, edition, pages
Stockholm: KTH, 2010. 13 p.
Series
TRITA-FOB, 2010:4
Keyword
rent, space syntax, valuation, index, real estate, accessibility, capitalisation rate
National Category
Economics
Identifiers
urn:nbn:se:kth:diva-26801 (URN)978-91-978692-1-8 (ISBN)
Public defence
2010-12-20, D2, Lindstedtsv 5 Entreplan, KTH, 09:00 (English)
Opponent
Supervisors
Note
QC 20101201Available from: 2010-12-01 Created: 2010-11-29 Last updated: 2010-12-09Bibliographically approved

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CiteExportLink to record
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