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Research partly funded by. Segmenting the Paris residential market according to temporal evolution and housing attributes. Michel Baroni, ESSEC Business School, France Fabrice Barthélémy, Univ. de Cergy-Pontoise, France François Des Rosiers, Laval University, Canada - PowerPoint PPT Presentation
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Segmenting the Paris residential market according to temporal evolution
and housing attributes
Michel Baroni, ESSEC Business School, France
Fabrice Barthélémy, Univ. de Cergy-Pontoise, France
François Des Rosiers, Laval University, Canada
Paper presented at the 2009 ERES International Conference,Stockholm, Sweden, June 24-27
Research partly funded by
Objective and Context of Research
This study aims at testing the existence of similarities and differences in the pricing of housing characteristics among the twenty “arrondissements” of Paris, France.
The complexity of metropolitan residential markets makes it most relevant to assume that hedonic prices are not homogeneous over time and space.
If so, various submarkets may be generated based on selected housing attributes affecting both the level and evolution of prices.
This market differentiation issue is all the more relevant in a rapidly changing real estate context and when looked upon from the investor’s perspective.2
Literature Review – Market Segmentation and House Price Appreciation
Several authors have investigated the heterogeneity-of-attributes and market segmentation issues (Bajic, 1985; Can & Megbolugbe, 1997; Goodman & Thibodeau, 1998 and 2003; Thériault et al., 2003; Bourassa, Hoesli & Peng, 2003; Des Rosiers et al., 2007) as they affect the shaping and interpretation of hedonic prices and question a major assumption of the HP model (Rosen, 1974).
In that context, the price appreciation issue has been extensively addressed (Case & Quigley, 1991; Quigley, 1995; Knight, Dombrow and Sirmans, 1995; Meese & Wallace, 2003, for Paris dataset; Bourassa, Hoesli & Sun, 2006; Bourassa et al., 2009).
3
Literature Review – Market Segmentation and House Price Appreciation
Past research suggests that…:
Hedonic prices of housing attributes may vary over space and time according to submarket specifics and structure as well as to property buyers’ profiles;
Houses will appreciate at different rates depending on property characteristics, the relative bargaining power of agents and the strength of the local submarket;
Reliable estimates of the willingness-to-pay for housing attributes may be derived from the hedonic price (HP) framework in spite of the heterogeneity problem
4
Overall Analytical Approach
Step 1: Building a global hedonic price model for Paris as a whole, with a focus on the marginal contribution of time (Price Index), living area, building period and location (“arrondissements” dummies) on values.
Step 2: Performing a series of Principal Component Analyses (PCA) on selected cluster criteria using either level or change variables, depending on the context.
Step 3: Based on the interpretation of findings, homogeneous submarkets are generated and discussed.
5
The Database
The database (BIEN) is provided by the Chambre des Notaires de France and includes, after filtering, some 252,000 apartment sales spread over a 17 year period, that is from 1990 to 2006.
Housing descriptors include, among other things: Building age (construction period); Apartment size and number of rooms; Floor location in building; Number of bathrooms Presence of a garage; Type of street and access to building (blvd, square, alley, etc.); Location dummy variables standing for the 20 “arrondissements”
and 80 “neighbourhoods” (“quartiers”); Time dummy variables for sale year and month.6
Map 1: The Twenty Paris « Arrondissements »
Paris “Arrondissements” are structured according to a clockwise, spiral design starting in the central core of the city, on the north shore of the River Seine (Arr. 1) and ending up with Arr. 20, in the north-east area.
7
Descriptive Statistics
Number of cases by arrondissement and by nb. of rooms
24,65%
37,46%
22,20%
10,44%
4,19%
1,07%
0
0,05
0,1
0,15
0,2
0,25
0,3
0,35
0,4
1 room 2 rooms 3 rooms 4 rooms 5 rooms 6 rooms
80
2500
5000
7500
10000
12500
15000
17500
20000
22500
25000
27500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
18,3% of cases
81,7%of cases
Descriptive Statistics
Price (Euros) and Surface Area (m2) distributions
0
1
2
3
4
5
6
9
Descriptive Statistics
Number of cases by year of transaction
10
Main Regression Findings – Global Model / Price Index
11
Variable Parameter estimates
P value
1991 0.01550 0.0004
1992 -0.11145 <.0001
1993 -0.19251 <.0001
1994 -0.20110 <.0001
1995 -0.25941 <.0001
1996 -0.35339 <.0001
1997 -0.37273 <.0001
1998 -0.33591 <.0001
1999 -0.25001 <.0001
2000 -0.12115 <.0001
2001 -0.03100 <.0001
2002 0.06281 <.0001
2003 0.19801 <.0001
2004 0.33591 <.0001
2005 0.48493 <.0001
2006 0.59460 <.000111
Number of Obs.: 252,772 Dep. Variable: Ln Sale Price
R-Square: 0.9174 Mean Sale Price: 172,270 €
Main Regression Findings – Global Model / Price Index
12
Variable Parameter estimates
P value
1991 0.01550 0.0004
1992 -0.11145 <.0001
1993 -0.19251 <.0001
1994 -0.20110 <.0001
1995 -0.25941 <.0001
1996 -0.35339 <.0001
1997 -0.37273 <.0001
1998 -0.33591 <.0001
1999 -0.25001 <.0001
2000 -0.12115 <.0001
2001 -0.03100 <.0001
2002 0.06281 <.0001
2003 0.19801 <.0001
2004 0.33591 <.0001
2005 0.48493 <.0001
2006 0.59460 <.0001
SLUMP (P1 )
RECOVERY (P2)
BO
OM
(P3)
Number of Obs.: 252,772 Dep. Variable: Ln Sale Price
R-Square: 0.9174 Mean Sale Price: 172,270 €
Main Regression Findings –Global Model / Surface Area*Nb. of Rooms
0,9
0,95
1
1,05
1,1
-0,5
-0,4
-0,3
-0,2
-0,1
0
0,1
0,2
0,3
0,4
Variable Parameter estimates
P value
Surface x 1 room 0.98290 <.0001
Surface x 2 rooms 1.09367 <.0001
Surface x 3 rooms 1.08227 <.0001
Surface x 4 rooms 1.03351 <.0001
Surface x 5 rooms 1.02234 <.0001
Surface x 6 rooms 0.97621 <.0001
1 room Reference
2 rooms -0.38918 <.0001
3 rooms -0.33777 <.0001
4 rooms -0.12130 <.0001
5 rooms -0.06535 0.1891
6 rooms 0.14882 0.14261313
Main Regression Findings –Global Model / Building Period
-0,16
-0,14
-0,12
-0,1
-0,08
-0,06
-0,04
-0,02
0
Variable Parameter estimates
P value
epG (after 1991) reference
epF (1981-1991) -0.03797 <.0001
epE (1970-1980) -0.07804 <.0001
epD (1948-1969) -0.12034 <.0001
epC (1914-1947) -0.12756 <.0001
epB (1850-1913) -0.11485 <.0001
epA (before 1850) -0.09991 <.0001
14
The post-WW II period (epD) is characterized by a sharp decline in prices while a market premium is assigned to both Haussmannian (epB) and historic (epA) buildings.
Main Regression Findings –Global Model / Location
15
According to « quartier » According to « arrondissement »dummies, grouped by arrt. dummies
0,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95
2,15
2,35
2,55Arr1
Arr2
Arr3
Arr4
Arr5
Arr6
Arr7
Arr8
Arr9
Arr10
Arr11
Arr12
Arr13
Arr14
Arr15
Arr16
Arr17
Arr18
Arr19
Arr20
Main Regression Findings –Hedonic Price Index by « Arrondissement »
16
The graph shows differences among arrondissements:
- The 2nd arrondissement (at the top) ranks first (110% price rise) while the 16th (at the bottom) ranks last (40% rise)
- The 18th, 19th and 20th (relatively low-priced) arrondissements show a higher increase after 2003.
SLUMP (P1)
RECOVERY (P2)
BOOM (P3)
Resorting to PCA For Sorting Out Specific Residential Submarkets
The principal components method (PCA) is applied to each set of estimated effects of attributes.
The method essentially involves an orthogonal transformation of a set of variables (x1, x2, ..., xm) into a new set of mutually independent components, or factors (y1, y2, ..., ym) (King 1969), each of which consisting of a linear combination of all initial variables with weights that vary among components.
The first component, which captures the highest variance among the “m” set of components, also contributes most to the phenomenon under analysis.17
Main Findings From PCA – Price Index (1st & 2nd arrts, 1991 & 1992 excluded)
PC1 reflects the size effect: index level is maintained over time
PC2 reflects price volatility of arrondissements: above-average
decreases (1993-1997) vs. above-average increases (1998-2002)
PC3 reflects the trend: under-performance during the boom period
(2003-2006)
Correlations between Principal Components and years
Eigenvalues Cumulated %
1 9.697 0.6927
2 2.852 0.8964
3 0.903 0.961018 SLUMP RECOVERY BOOM
Main Findings From PCA – Price Index
19• PC1: The 16th arrondissement prices show a specific behaviour
• PC2: The central arrondissements prices are more volatile than the outlying ones
PC
2
PC 1
Main Findings From PCA – Price Index
20PC 1
PC
3
Overall below-average indexduring the slump Overall above-average
index (specially during the slump)
Over-performance during the boom
Main Findings From PCA – Price Index
21 PC 2
PC
3
Below-average P1
Above-average P2
Below-average P3
Above-average P1
Below-average P2
Below-average P3
Above-average P1
Below-average P2
Above-average P3
Below-average P1
Above-average P2
Above-average P3
0,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95Arr10
Arr11
Arr12
Arr13
Arr14
Arr15
Arr16
Arr17
Arr18
Arr19
Arr20
Main Findings From PCA – Price Index
22
Outlying arrondissements
0,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95 Arr1
Arr2
Arr3
Arr4
Arr5
Arr6
Arr7
Arr8
Arr9
Centralarrondissements
Main Findings From PCA – Price Index
230,65
0,85
1,05
1,25
1,45
1,65
1,85
2,05
Arr3
Arr4
Arr5
Arr6
Arr9
0,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95
Arr7
Arr8
Central arrondissements
23
0,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95
Arr10
Arr18
Arr19
Arr20
Main Findings From PCA – Price Index
240,55
0,75
0,95
1,15
1,35
1,55
1,75
1,95
Arr12
Arr13
Arr14
Arr15
Arr17
Arr19
Outlying arrondissements
24
Main Findings From PCA – Price Index
25
1
1,1
1,2
1,3
1,4
1,5
1,6
1,7
1
1,1
1,2
1,3
1,4
1,5
1,6
1,7
1,8
1,9
SLUMP RECOVERY BOOM
By and large, medium-size apartments (2 & 3 rooms) tend to display price elasticities that are both more similar and more stable among arrondissements than either smaller or larger apartments do.
The 6-room apartments have been excluded from the PCA computation.
Main Findings From PCA – Price Elasticities of Living Area* Nb. Rooms
26
0,8
0,85
0,9
0,95
1
1,05
1,1
1,15
1,2
1,25
Surface x 1 room Surface x 2 rooms Surface x 3 rooms
Surface x 4 rooms Surface x 5 rooms
Ratio > 1 = greater-than-average elasticity.
For smaller apartments (1-3 rooms), elasticities move in the same way and are similar.
Relative elasticities for smaller and larger apartments move inversely and are more pronounced for the 5-room apartments.
Relative elasticities for the 4-room apartments tend to vary in phase with those of the 5-room apartments, but with a lower magnitude.
Main Findings From PCA – Price Elasticities of Living Area* Nb. Rooms
27
Relative elasticity (e divided by average e) for a given number of rooms
Eigenvalues of the Covariance Matrix
Eigenvalues Difference Proportion Cumulated %
1 0.0157 0.007503 0.5513 0.5513
2 0.0082 0.004516 0.2891 0.8404
3 0.0037 0.003299 0.1312 0.9716
Main Findings From PCA – Price Elasticities of Living Area* Nb. Rooms
PC 1 opposes smaller apartments (1-room and, to a lesser extent, 2 and 3-room apartments) to larger ones (5-room and, to a lesser extent, 4-room apartments).
PC 2 accounts for the size effect and sorts out the arrondissements with below-average elasticities from those with above-average elasticities.
PC 3 parts the 2-room apartments (above-average e) from the 4-room apartments (below-average e). 28
Principal components description
Main Findings From PCA – Price Elasticities of Living Area*Nb. Rooms
Relatively strong elasticity for the large apartments (4-5 rooms)
Relatively strong elasticity for the small apartments (1-3 rooms)
29
Pereire (Giffen good) effect?
Concluding Comments and Suggestions for Further Research
Based on the above findings, it is possible to assert that, while some housing attributes may display stable hedonic prices over space and time, others don’t.
This paves the way for structuring specific housing submarkets in Paris around price indices, price elasticities of living area, building period, etc.
In particular, a major contribution of this research is to highlight the existence of a twofold residential dynamics in the Paris region, with the central « arrondissements » clearly parting from outlying ones with respect to apartment price appreciation over time.30
Concluding Comments and Suggestions for Further Research
Furthermore, preliminary research findings also suggest that hedonic prices of various housing attributes also differ among Paris « quartiers », which implies that the « arrondissements », although currently serving as the basic spatial entity for administrative purposes, may not be as homogeneous as generally considered.
Finally, while this research uses Paris as a case study, its conclusions extend well beyond any particular context and may be assumed to apply to most metropolitan urban areas in Europe and elsewhere.
31
References
Bajic, V. (1985). Housing Market Segmentation And Demand For Housing Attributes: Some Empirical Findings, AREUEA Journal, 13(1), 58-75.
Bourassa, S.C., Hoesli, M. and Peng, V.S. (2003). Do Housing Submarkets Really Matter?, Journal of Housing Economics, 12: 12-28.
Bourassa, S.C., Hoesli, M. and Sun, J. (2006). A Simple Alternative House Price Index Method, Journal of Housing Economics, 15: 80-97.
Bourassa, S. C., Haurin, D., Haurin, J. L. and Hoesli, M. (2009). House Price Changes and Idiosyncratic Risk: The Impact of Property Characteristics, Real Estate Economics, forthcoming.
Can, A. et Megbolugbe, I. (1997). Spatial Dependence and House Price Index Construction, Journal of Real Estate Finance and Economics, 14(1-2): 203-222.
Case, B. and Quigley, J.M. (1991). The Dynamics of Real Estate Prices, Review of Economics and Statistics, 73(1): 50-58.
Des Rosiers, F., M. Thériault, Y. Kestens and P-Y. Villeneuve. 2007. Landscaping Attributes and Property Buyers’ Profiles: Their Joint Effects on House Prices, Journal of Housing Studies, 22:6, 945-964.
Goodman, A.C. et Thibodeau, T.G. (1998). Housing Market Segmentation, Journal of Housing Economics, 7(2): 121-143.
32
References
Goodman, A.C. et Thibodeau, T.G. (2003). Housing Market Segmentation and Hedonic Prediction Accuracy, Journal of Housing Economics, 12(3): 181-201.
King, Leslie J. (1969). King, 1969. Statistical Analysis in Geography, Prentice-Hall, Englewood Cliffs, N.J.
Knight, J.R., Dombrow, J. and Sirmans, C.F. (1995). A Varying Parameters Approach to Constructing House Price Indexes, Real Estate Economics, 23(2): 187-205.
Meese, R. and Wallace, N. (2003). House Price Dynamics and Market Fundamentals: The Parisian Housing Market, Urban Studies, 40:1027-1045.
Quigley, J.M. (1995). A Simple Hybrid Model for Estimating Real Estate Price Indices, Journal of Housing Economics, 4(12): 1-12.
Rosen, S. (1974). Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition, Journal of Political Economy, 82: 34-55.
Thériault, M., Des Rosiers, F., Villeneuve, P. et Kestens Y. (2003) « Modelling Interactions of Location with Specific Value of Housing Attributes ». Property Management, 21 (1): 25-62.
33
Appendices : Price Index Robustness
Pi = arrondissement i relative to Paris
Arri = arrondissement i alone
34
Appendices : Price Index Robustness
35
Appendices : Price Index Robustness
High robustness except for 1991-1992 and arrondissement 1 & 2.
36