Decomposing Residential Resale House Prices into Structure and Land Components

The use of hedonic regression models on the sales of detached housing units is widespread in the real estate literature. However, these models do not address the need to decompose the sale price into structure and land components. For many purposes, it is necessary to obtain separate estimates for the price and quantity of housing structures and the land that these structures sit on. The builder’s model accomplishes this decomposition but it takes a producer’s perspective and requires an exogeneous structure price index. In the present paper, a consumer approach to the decomposition problem is taken and this “new” approach to the decomposition problem does not require the use of an exogenous building price index. The paper uses data on sales of detached houses in Richmond, British Columbia in order to implement the new approach. The property price indexes generated by the new approach are compared to the corresponding indexes generated by a traditional time dummy hedonic regression model. The traditional hedonic regression approach does generate reasonable overall property price indexes, but the two approaches do not generate similar land and structure subindexes.