The Hierarchical Repeat Sales Model for Granular Commercial Real Estate and Residential Price Indices

Posted: 27 Nov 2017

See all articles by Marc Francke

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

Alex Van de Minne

University of Connecticut - Department of Finance

Date Written: November 20, 2017

Abstract

This paper concerns the estimation of granular property price indices in commercial real estate and residential markets. We specify and apply a repeat sales model with multiple stochastic log price trends having a hierarchical additive structure: One common log price trend and cluster specific log price trends in deviation from the common trend. Moreover, we assume that the error terms potentially have a heavy tailed (t) distribution to effectively deal with outliers. We apply the hierarchical repeat sales model on commercial properties in the Philadelphia/Baltimore region and on residential properties in a small part of Amsterdam. the results show that the hierarchical repeat sales model provides reliable indices on a very detailed level based on a small number of observations. The estimated degrees of freedom for the t-distribution is small, largely rejecting the commonly made assumption of normality of the error term.

Keywords: commercial real estate; Residential real estate; property price indices; Thin markets; Bayesian inference; Kalman filter; State space models

Suggested Citation

Francke, Marc and Van de Minne, Alex, The Hierarchical Repeat Sales Model for Granular Commercial Real Estate and Residential Price Indices (November 20, 2017). Journal of Real Estate Finance and Economics, Vol. 55, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=3074649

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands
+ 31 20 7009 700 (Phone)
+ 31 20 7009 701 (Fax)

HOME PAGE: http://www.ortec-finance.com

Alex Van de Minne (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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