# RECORD 30bb06cf60733bf6f9bbacbca2bbc1d2e8d63b85 # TITLE: Construction of Residential Property Price Indices Using the Hedonic Approach: An Application to the Residential Real Estate Market in Sri Lanka # YEAR: 2021.0 VENUE: Staff Studies DOI: 10.4038/ss.v51i1.4729 # AUTHORS: S. Gunawardhana # PAGES: 18 CANDIDATE TABLE PAGES (1-based): [] # ABSTRACT: Monitoring real estate property prices is crucial for policy makers all over the world, particularly for central banks due to their interconnections with the monetary and financial system stability of an economy. As a result, compiling property price indices has increasingly gained attention from policymakers. However, compiling property price indices is believed to be difficult due to the highly heterogeneous nature of properties, requiring reliable data sources and a methodological approach that is different to those used in compiling other price indices. Against this backdrop, this paper attempts to compile price indices for residential properties in Sri Lanka with a view to supporting policymakers to monitor the price movements in the real estate sector. Considering the relatively less heterogenous nature of condominiums and stages of the buying and selling process, price indices are first developed for advertised condominiums and new condominiums using the Hedonic Regression based Rolling Window Time Dummy method, which is identified as the most suited property price index compilation method in the Sri Lankan context. Further, internationally accepted model specification improvement techniques and index smoothing techniques are also used in the study. Upon successful compilation of price indices for condominiums, the compilation process has been extended to cover the house and land markets of Sri Lanka. ===== PAGE 1 (score 2, numeric-paren 0, table-words 0, var-words 2) ===== 61 Construction of Residential Property Price Indices Using the Hedonic Approach: An Application to the Residential Real Estate Market in Sri Lanka1 S R C L Gunawardhana2 Abstract Monitoring real estate property prices is crucial for policy makers all over the world, particularly for central banks due to their interconnections with the monetary and financial system stability of an economy. As a result, compiling property price indices has increasingly gained attention from policymakers. However, compiling property price indices is believed to be difficult due to the highly heterogeneous nature of properties, requiring reliable data sources and a methodological approach that is different to those used in compiling other price indices. Against this backdrop, this paper attempts to compile price indices for residential properties in Sri Lanka with a view to supporting policymakers to monitor the price movements in the real estate sector. Considering the relatively less heterogenous nature of condominiums and stages of the buying and selling process, price indices are first developed for advertised condominiums and new condominiums using the Hedonic Regression based Rolling Window Time Dummy method, which is identified as the most suited property price index compilation method in the Sri Lankan context. Further, internationally accepted model specification improvement techniques and index smoothing techniques are also used in the study. Upon successful compilation of price indices for condominiums, the compilation process has been extended to cover the house and land markets of Sri Lanka. Key Words: Residential Property Price Index, Hedonic Regression, Asking Prices, Constant Quality Indices JEL Classification: C2, C10, C43, C81, C82, C83, D12, E31, R21, R30, R31 1 The author is thankful to Mr. N O’Hanlon, Statistics Department of the International Monetary Fund (IMF) for providing technical assistance for this index compilation process and the Data for Decisions (D4D) fund of IMF for funding the technical assistance missions. The author is also thankful to Mr. A R K Wijesekara, Former Assistant Governor, Central Bank of Sri Lanka, Mr. G D P D Jayathilake, Former Director, Statistics Department of the Central Bank of Sri Lanka, Dr. (Mrs.) H K J Ekanayake, Director, Statistics Department of the Central Bank of Sri Lanka, Mrs. D G D I Ekanayake, Additional Director, Statistics Department of the Central Bank of Sri Lanka, Ms. R M M K Rathnayake, Deputy Director, Statistics Department of the Central Bank of Sri Lanka, Ms. P I Rupasinghe, Head of Economic Indicators and Statistical Investigations Division, Statistics Department of the Central Bank of Sri Lanka for their guidance and support extended throughout this study. In addition, the author would like to express her sincere thanks to all the staff members of the Economic Indicators and Statistical Investigations Division of Statistics Department of the Central Bank of Sri Lanka for contributing to the index compilation process in various stages. The views expressed in this paper are the author’s own and do not necessarily reflect those of the Central Bank of Sri Lanka. 2 Senior Assistant Director, Statistics Department, Central Bank of Sri Lanka (chamili@cbsl.lk)