The Central Bank of Iceland has published the working paper "A Hedonic Housing Model for Macroprudential Policy" by Önundur Páll Ragnarsson, economist in the department of Financial Stability.
The paper examines a granular dataset on residential real estate transactions, both sales and rental, in Iceland’s main urban area, provides descriptive statistics for both markets and develops a hedonic model of the sales market multi-dwelling segment. Main findings are: (1) An average quality difference of 8.8% between sold and rented apartments suggests bias in a non-quality adjusted price-to-rent ratio over the period 2011-2022. Asymmetric quality developments over time in the sales and rental markets also suggest time-varying quality-bias. (2) Accumulated bias in a CPI-deflated non-quality adjusted index for the greater Reykjavík area multi-dwelling sales market, from 2007 to 2024, compared to a quality-adjusted index, is 3.7%. (3) The estimated time-varying new house premium can provide insight into housing sales market supply and demand conditions and aid the identification of housing bubbles. (4) A hedonic price-to-building cost ratio shows different short-run dynamics than a non-quality adjusted ratio.
The working paper by Önundur Páll Ragnarsson can be accessed here: