Econometric Issues in Hedonic Property Price Indices: Some Practical Help

Abstract

Hedonic regressions are widely used and recommended for property price index (PPI) measurement. Hedonic PPIs control for changes in the quality-mix of properties transacted that can confound measures of change in average property prices. The widespread adoption of the hedonic approach is primarily due to the increasing availability, in this digital age, of electronic data on advertised and transaction prices of properties and their price-determining characteristics. Yet hedonic PPIs are only as good as the underlying estimated hedonic regressions. Regression-based measures are unusual in official economic statistics. There is little technical support in the international Handbooks and Guides for diagnostic measures and graphical plots for estimated regression equations as applied to PPIs. These diagnostics are essential to the transparency and credibility of hedonic PPI measurement. This article seeks to remedy this.