Estimation of Residential Property Price Index: Methodology and Data Sources

Abstract

Fluctuations in real estate prices have substantial impacts on economic activities. In Japan, a sharp rise in real estate prices during the latter half of the 1980s and its decline in the early 1990s led to a decade-long stagnation of the Japanese economy. More recently, a rapid rise in housing prices and its reversal in the United States triggered a global financial crisis. In such circumstances, the development of appropriate indexes that allow one to capture changes in real estate prices with precision is extremely important, not only for policy makers but also for market participants who are looking for the time when housing prices hit bottom. Recent research has focussed on methods of compiling appropriate residential property price indexes. The location, maintenance and the facilities of each house are different from each other in varying degrees, so there are no two houses that are identical in terms of quality. Even if the location and basic structure are the same at two periods of time, the building ages over time and the houses are not identical across time. In other words, it is very difficult to apply the usual matching methodology (where the prices of exactly the same item are compared over time) to housing.