• Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data
  Chihiro ShimizuKiyohiko G.NishimuraTsutomu WatanabeW. Erwin Diewert

  Abstract

  We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e., the discount rate) and the numerator (i.e., cash flows from properties) are estimated differs from the traditional method. We run a hedonic regression to estimate the quality adjusted discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated only with new rental contracts rather than those associated with all existing contracts. Using a dataset with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001 to 2013, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the second quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.

  Introduction

  Looking back at the history of economic crises, there are a considerable number of cases where a crisis was triggered by the collapse of a real estate price bubble. For example, it is widely accepted that the collapse of Japan’s land and stock price bubble in the early 1990s has played an important role in the subsequent economic stagnation, and in particular the banking crisis that started in the latter half of the 1990s. Similarly, the Nordic banking crisis in the early 1990s also occurred in tandem with a property bubble collapse, while the global financial crisis that began in the United States in 2008 and the European debt crisis were also triggered by the collapse of bubbles in the property and financial markets.

  2015.02

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• The Consumer Price Index: Recent Developments
  W. Erwin Diewert

  Abstract

  The 2004 International Labour Office Consumer Price Index Manual: Theory and Practice summarized the state of the art for constructing Consumer Price Indexes (CPIs) at that time. In the intervening decade, there have been some significant new developments which are reviewed in this paper. The CPI Manual recommended the use of chained superlative indexes for a month to month CPI. However, subsequent experience with the use of monthly scanner data has shown that a significant chain drift problem can occur. The paper explains the nature of the problem and reviews possible solutions to overcome the problem. The paper also describes the recently developed Time Dummy Product method for constructing elementary index numbers (indexes at lower levels of aggregation where only price information is available).

  Introduction

  A decade has passed since the Consumer Price Index Manual: Theory and Practice was published. Thus it seems appropriate to review the advice given in the Manual in the light of research over the past decade. It turns out that there have been some significant developments that should be taken into account in the next revision of the Manual.

  2013.10

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• The Estimation of Owner Occupied Housing Indexes using the RPPI: The Case of Tokyo
  Chihiro ShimizuKiyohiko G.NishimuraTsutomu WatanabeW. Erwin Diewert

  Abstract

  Dramatic increases and decreases in housing prices have had an enormous impact on the economies of various countries. If this kind of fluctuation in housing prices is linked to fluctuations in the consumer price index (CPI) and GDP, it may be reflected in fiscal and monetary policies. However, during the 1980s housing bubble in Japan and the later U.S. housing bubble, fluctuations in asset prices were not sufficiently reflected in price statistics and the like. The estimation of imputed rent for owneroccupied housing is said to be one of the most important factors for this. Using multiple previously proposed methods, this study estimated the imputed rent for owner-occupied housing in Tokyo and clarified the extent to which the estimated imputed rent diverged depending on the estimation method. Examining the results obtained showed that, during the bubble’s peak, there was an 11-fold discrepancy between the Equivalent Rent Approach currently employed in Japan and Equivalent Rent calculated with a hedonic approach using market rent. Meanwhile, with the User Cost Approach, during the bubble period when asset prices rose significantly, the values became negative with some estimation methods. Accordingly, we estimated Diewert’s OOH Index, which was proposed by Diewert and Nakamura (2009). When the Diewert’s OOH Index results estimated here were compared to Equivalent Rent Approach estimation results modified with the hedonic approach using market rent, it revealed that from 1990 to 2009, the Diewert’s OOH Index results were on average 1.7 times greater than the Equivalent Rent Approach results, with a maximum 3-fold difference. These findings suggest that even when the Equivalent Rent Approach is improved, significant discrepancies remain.

  Introduction

  Housing price fluctuations exert effects on the economy through various channels. More precisely, however, relative prices between housing and other assets prices and goods/services prices are the variable that should be observed.

  2013.10

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• Residential Property Price Indexes for Tokyo
  Chihiro ShimizuW. Erwin Diewert

  Abstract

  The paper uses hedonic regression techniques in order to decompose the price of a house into land and structure components using real estate sales data for Tokyo. In order to get sensible results, a nonlinear regression model using data that covered multiple time periods was used. Collinearity between the amount of land and structure in each residential property leads to inaccurate estimates for the land and structure value of a property. This collinearity problem was solved by using exogenous information on the rate of growth of construction costs in Tokyo in order to get useful constant quality subindexes for the price of land and structures separately.

  Introduction

  In this paper, we will use hedonic regression techniques in order to construct a quarterly constant quality price index for the sales of residential properties in Tokyo for the years 2000-2010 (44 quarters in all). The usual application of a time dummy hedonic regression model to sales of houses does not lead to a decomposition of the sale price into a structure component and a land component. But such a decomposition is required for many purposes. Our paper will attempt to use hedonic regression techniques in order to provide such a decomposition for Tokyo house prices. Instead of entering characteristics into our regressions in a linear fashion, we enter them as piece-wise linear functions or spline functions to achieve greater flexibility.

  2013.10

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• A Conceptual Framework for Commercial Property Price Indexes
  Chihiro ShimizuW. Erwin Diewert

  Abstract

  The paper studies the problems associated with the construction of price indexes for commercial properties that could be used in the System of National Accounts. Property price indexes are required for the stocks of commercial properties in the Balance Sheets of the country and related price indexes for the land and structure components of a commercial property are required in the Income Accounts of the country if the Multifactor Productivity of the Commercial Property Industry is calculated as part of the System of National accounts. The paper suggests a variant of the capitalization of the Net Operating Income approach to the construction of property price indexes and uses the one hoss shay or light bulb model of depreciation as a model of depreciation for the structure component of a commercial property.

  Introduction

  Many of the property price bubbles experienced during the 20th century were triggered by steep increases and sharp decreases in commercial property prices. Given this, there is a need to construct commercial property price indexes but exactly how should these prices be measured? Since commercial property is highly heterogeneous compared to housing and the number of transactions is also much lower, it is extremely difficult to capture trends in this market. In addition, many countries have been experiencing large investments in commercial properties and in countries where the market has matured, depreciation and investments in improvements and renovations represents a substantial fraction of national output. But clear measurement methods for the treatment of these expenditures in the System of National Accounts are lacking. Given this, one may say that the economic value of commercial property in particular is one of the indicators that is most difficult to measure on a day-to-day basis and that statistical development related to this is one of the fields that has perhaps lagged the furthest behind. Indexes based on transaction prices for commercial properties have begun to appear in recent years, especially in the U.S. However, in many cases, these indexes are based on property appraisal prices. But appraisal prices need to be based on a firm methodology. Thus in this paper, we will briefly review possible appraisal methodologies and then develop in more detail what we think is the most promising approach.

  2013.10

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• Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data
  Chihiro ShimizuKiyohiko G.NishimuraTsutomu WatanabeW. Erwin Diewert

  Abstract

  We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e., the discount rate) and the numerator (i.e., cash flows from properties) are estimated differs from the traditional method. We estimate the discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated only with new rental contracts rather than those associated with all existing contracts. Using a dataset with prices and cash flows for about 500 commercial properties included in Japanese REITs for the period 2003 to 2010, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the first quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.

  Introduction

  Looking back at the history of economic crises, there are a considerable number of cases where a crisis was triggered by the collapse of real estate price bubbles. For example, it is widely accepted that the collapse of Japan’s land/stock price bubble in the early 1990s has played an important role in the subsequent economic stagnation, and in particular the banking crisis that started in the latter half of the 1990s. Similarly, the Nordic banking crisis in the early 1990s also occurred in tandem with a property bubble collapse, while the global financial crisis that began in the U.S. in 2008 and the recent European debt crisis were also triggered by the collapse of bubbles in the property and financial markets.

  2013.02

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