Construction of Residential Property Price Indices Using the Hedonic Approach: An Application to the Residential Real Estate Market in Sri Lanka

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.