Controlling for Quality in House Price Indices

Given the importance of house prices it is not surprising that house price indices are used for many purposes. One of the factors that differentiates these indices is the house price determinants (such as structural characteristics and neighborhood quality) that are accounted for—that is, held constant. Indices are usually generated from house price regressions. It is shown that, regardless of the desired level of accounting, it is necessary to control for all significant determinants of house prices in these regressions to obtain unbiased estimates of the growth in house prices. An empirical example shows that not controlling for neighborhood quality can lead to substantial biases in estimates of house price appreciation rates even if the index does not account for this factor.