A State Space Model for Berlin House Prices: Estimation and Economic Interpretation

Hedonic regression has become the standard approach for modeling the behavior of house prices. Usually, the common price component is modeled via dummy variables. Based on an approximation for the present value, we deliver an economic interpretation of the common price component. This allows to include explanatory factors like inflation rates, mortgage rates and building permissions. The notional rents for houses are fitted with a flexible hedonic function. We use the EM algorithm to estimate our model with monthly data of single-family house sales from the four South-West districts of Berlin, Germany from 1982:8 to 1999:12. Emphasis is put on the interpretation of the results.

[1]  M. White,et al.  Taxing and Subsidizing Housing Investment: The Rise and Fall of Housing&Apos;S Favored Status , 2000 .

[2]  C. F. Sirmans,et al.  Estimating Capital Asset Price Indexes , 1997, Review of Economics and Statistics.

[3]  S. Rosen.  Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition , 1974, Journal of Political Economy.

[4]  Jörg Polzehl,et al.  Model Selection, Transformations and Variance Estimation in Nonlinear Regression , 1999 .

[5]  D. Rubin,et al.  Maximum likelihood from incomplete data via the EM - algorithm plus discussions on the paper , 1977 .

[6]  Andrew Harvey,et al.  Forecasting, Structural Time Series Models and the Kalman Filter , 1990 .

[7]  Robert F. Engle,et al.  A dymimic model of housing price determination , 1985 .

[8]  C. F. Sirmans,et al.  Aggregation Bias in Repeat-Sales Indices , 1997 .

[9]  Siem Jan Koopman,et al.  Time Series Analysis by State Space Methods , 2001 .

[10]  David S. Stoffer,et al.  Time series analysis and its applications , 2000 .

[11]  R. Engle,et al.  A One-Factor Multivariate Time Series Model of Metropolitan Wage Rates , 1981 .

[12]  R. Shiller,et al.  Comparing Wealth Effects: The Stock Market Versus the Housing Market , 2001 .

[13]  D. Bruce,et al.  Fundamental Tax Reform and Residential Housing , 1999 .

[14]  A. Lo,et al.  THE ECONOMETRICS OF FINANCIAL MARKETS , 1996, Macroeconomic Dynamics.

[15]  Robert J. Shiller,et al.  Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks , 1995 .

[16]  I. Megbolugbe,et al.  Appraisals, Transaction Incentives, and Smoothing , 1997 .

[17]  G. Schwann.  A Real Estate Price Index for Thin Markets , 1998 .

[18]  Yannis M. Ioannides,et al.  House Price Dynamics: An International Empirical Perspective , 1997 .

[19]  James M. Poterba,et al.  House Price Dynamics: The Role of Tax Policy , 1991 .

[20]  John M. Quigley,et al.  The Dynamics of Real Estate Prices , 1991 .

[21]  Jeffrey Pai,et al.  AN ALGORITHM FOR ESTIMATING PARAMETERS OF STATE-SPACE MODELS , 1996 .

[22]  D. Miles,et al.  Housing, financial markets and the wider economy , 1994 .

[23]  R. Shiller,et al.  Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures , 1993 .

[24]  Raymond B. Palmquist.  Alternative Techniques for Developing Real Estate Price Indexes , 1980 .

[25]  R. Engle,et al.  Alternative Algorithms for the Estimation of Dynamic Factor , 1983 .

[26]  David C. Ling,et al.  Economic Risk Factors and Commercial Real Estate Returns , 1997 .

[27]  P. Englund,et al.  The Capitalization of Interest Subsidies: Evidence from Sweden , 1998 .

[28]  R. Shumway,et al.  AN APPROACH TO TIME SERIES SMOOTHING AND FORECASTING USING THE EM ALGORITHM , 1982 .

[29]  J. Poterba.  Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach , 1984 .