Measuring Local House Price Movement in Israel and Estimating Price Elasticity

Abstract

This paper studies price movements over the past decade in the Israeli housing market at the regional level and analyzes the variables that affect housing prices and the estimation of their elasticity. The price indices were calculated based on the hedonic methodology, using the CPIM technique (tracking a representative house). The selected model was adapted to the Israeli market after conducting numerous simulations to optimize the structure of the function and the number and type of explanatory variables.

The basic research assumption posits that the housing market does not consist of a single market, but of several submarkets having mixed price trends that differ in their intensity. The existence of varying price trends in different geographical areas stems from differential levels of regional demand deriving from a range of parameters, such as the local unemployment rate, regional disposable household income, regional balance of migration and so forth. On the supply side, regional parameters affecting the housing market include the unsold inventory level, the number of housing starts, etc.

The measurement was carried out over the years 1999-2009 in nine geographical submarkets in Israel encompassing 64 urban communities, using a least-squares multivariable hedonic regression analysis, and it explains, on average, more than 70% of the variance in prices of houses by means of eight explanatory variables. The majority of the explanatory variables included in the study were found to have a level of significance of 5% or less.

Keywords: hedonic price, price index, quality adjustment, hedonic regression, utility function, measurement by the least-squares method