Definition of quality-adjusted house prices

The prices of homes are influenced by their internal and external features and location, which altogether are termed their 'quality'.

Within any housing market, homes of different qualities are likely to be traded over time. This can lead to severe biases in house price indices based on the average values of properties traded. 

Two common approaches to quality-adjustment are repeat sales and hedonic models. In repeat sales indices, only the prices of properties with known previously traded values are included. In hedonic-based indices, values are estimated for specific property attributes and aggregated.

Both approaches have strengths and weaknesses but are a great improvement on the average approach. Simple repeat sales indices exclude new property and have sample selection biases. Hedonic indices may miss out important variables necessary to adjust quality.

Example

Examples of repeat-sales indices are the Case-Schiller index of US cities and the Land Registry house price index for England and Wales.

Examples of the hedonic approach are the Halifax house price index for the UK and the Notaires-INSEE index in France. Because of 'quality' effects, when investing in residential property it should not be assumed that the price performance of the residential asset in question will be accurately measured by the available house price indices. [1]

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