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A State Space Model for Berlin House Prices: Estimation and Economic Interpretation

Referierte Aufsätze Web of Science

Axel Werwatz, Rainer Schulz

In: Journal of Real Estate Finance and Economics 28 (2004), 1, S.37-57


Hedonic regression has become the standard approach for modeling the behavior of house prices. Usually, the common price component is modeled via dummy variables. Based on an approximation for the present value, we deliver an economic interpretation of the common price component. This allows to include explanatory factors like inflation rates, mortgage rates and building permissions. The notional rents for houses are fitted with a flexible hedonic function. We use the EM algorithm to estimate our model with monthly data of single-family house sales from the four South-West districts of Berlin, Germany from 1982:8 to 1999:12. Emphasis is put on the interpretation of the results.