A new framework to disentangle the impact of changes in dwelling characteristics on house price indices

While house price indices aim to measure the change in price of an identical dwelling over time, many are unable to sufficiently control for changes in the quality of the houses sold. This change in quality is a known, but rarely measured, factor. Our paper proposes a new framework to disentangle and quantify the contribution of each individual dwelling characteristic to the quality change. It can be applied to many frequently used hedonic house price indices and allows for non-linear, time-varying price premia for the various dwelling characteristics. Using data from Belgium for 2011 Q3 -2021 Q2, we found that the quality of the houses sold increased substantially, mostly due to improvements in energy efficiency. As energy performance will continue to improve to meet European climate goals, statistical agencies should incorporate it into the construction of their house price indices in order to avoid overestimating price growth.

Automated summary

While house price indices struggle to account for changes in house quality, our paper proposes a new framework that quantifies the impact of individual dwelling characteristics on quality change. Using Belgium data, we found substantial improvements in house quality due to energy efficiency upgrades. To avoid overestimating price growth, statistical agencies should incorporate energy performance into house price indices.