A New Approach to Establishing an Apartment Price Index in Seoul based on Blinder-Oaxaca Decomposition

We establish a house price index for Seoul based on a Fisher Ideal aggregation of a two-way Blinder-Oaxaca (BO) decomposition, the FIBO index. Applying the BO decomposition to the apartment market decomposes the intercity differences in the mean house prices into two parts: (i) differences that are due to the differences in housing characteristics across areas (endowment effects) and (ii) differences that arise from the interarea differences in implicit prices of those characteristics (coefficient effects). Using actual transaction data for apartments in Seoul from 2017 to 2022, the FIBO index is constructed based on the estimated coefficient effects. Robustness tests show that our method is far less influenced by changes in sample sizes and selection of the reference. We also show that the FIBO index more accurately reflects the actual movement and fluctuation of apartment prices compared to existing indices, which suggests that the FIBO index could serve as a good complementary house price index.