The Central Bank of Iceland has published Working Paper no. 99, “A Hedonic Housing Model for Macroprudential Policy”, by Önundur Páll Ragnarsson. The paper analyses granular residential real estate transaction data, covering both sales and rentals in Iceland’s main urban area, and develops a hedonic model for the multi-dwelling segment of the sales market. Using the hedonic approach, the study finds an average quality difference of 8.8% between sold and rented apartments, indicating that a non-quality adjusted price-to-rent ratio was biased over 2011–2022 and that the bias may vary over time as market quality evolves asymmetrically. It also estimates that the accumulated bias in a CPI-deflated non-quality adjusted index for the greater Reykjavík area multi-dwelling sales market over 2007–2024 is 3.7% relative to a quality-adjusted index. Additional results include a time-varying new house premium as a potential indicator of housing market supply and demand conditions and a hedonic price-to-building cost ratio that exhibits different short-run dynamics than a non-quality adjusted ratio.
Central Bank of Iceland 2025-06-30
Central Bank of Iceland publishes hedonic housing model paper highlighting 8.8% sales to rental quality gap
The Central Bank of Iceland's Working Paper no. 99, "A Hedonic Housing Model for Macroprudential Policy," analyzes residential real estate data to develop a hedonic model for Iceland's multi-dwelling sales market, revealing an 8.8% quality difference between sold and rented apartments and a 3.7% accumulated bias in a CPI-deflated non-quality adjusted index over 2007–2024. The study identifies a time-varying new house premium and differing short-run dynamics in the hedonic price-to-building cost ratio.