A Housing Price Index with the Improvement-Value Adjusted Repeated-Sales (IVARS) Method

Article Classification: Research Paper (Construction or testing of a model or framework).

Purpose: The repeat sales house price index has been widely used to measure house price movements on the assumption that the quality of properties does not change over time. This study aims to develop a novel improvement-value adjusted repeat sales (IVARS) house price index to remedy the bias due to the constant-quality assumption.

Design/Methodology/Approach: This study compares the performance of the IVARS model with the traditional hedonic price model and the repeat sales model by using half a million repeated sales pairs of housing transactions in the Auckland Region of New Zealand, and by a simulation approach.

Findings: The results demonstrate that using the information on improvement values from mass appraisal can significantly mitigate the time-varying attribute bias. Simulation analysis further reveals that if the improvement work done is not considered, the repeat sales house price index may be overestimated by 2.7% per annum. The more quality enhancement a property has, the more likely it is that the property will be resold.

Originality: The novel IVARS index can help gauge house price movements with housing quality changes.

Practical Implications: This novel index may have the potential to enable the inclusion of home condition reporting in property value assessments prior to listing open market sales.