Appraising South African residential property and measuring price developments.

Abstract

Housing wealth is well established as one of the most important sources of wealth for households and investors. However, owning a home is a fundamental human need, making monitoring residential property prices a social endeavour as well as an economic one, especially under times of economic uncertainty. Residential property prices also have a direct effect on the macroeconomy because of how they influence wealth effects where increased consumption by households is experienced through gains in households balance sheets due to increased equity. Collecting correct and adequate data is vitally important in analysing property market movements and developments, particularly given globalization, and the interlinked nature of financial markets. Although measuring residential property price developments is an important economic and social activity, matching properties over time is extremely difficult because the sale of homes is typically infrequent, characteristics vary, and homes are uniquely located in space. This thesis focuses on appraising several residential property types located throughout South Africa from January 2013 to August 2017, investigating different modelling approaches with the aim of developing a residential property price index. Various methods exist to create residential property price indices, however, hedonic models have proven useful as a quality adjusted approach where pure price changes are measured and not simply changes in the composition of samples over time. Before fitting any models to appraise homes, an autoencoder was built to detect anomalous data, due to human error at the data entry stage. The autoencoder identified improbable data resulting in a final data set of 415 200 records, once duplicate records were identified and removed. This study first investigated generalised linear models as a candidate approach to appraise homes in South Africa which showed possible alternatives to the ubiquitous log linear model. Relaxing functional form assumptions and considering the nested locational structure of homes, hierarchical generalised linear models were considered as the next candidate method. Partitioning around the mediods was applied to find additional spatial groupings which were treated as random effects along with the suburb. The findings showed that the marginal utility of structural attributes was non-linear and smooth functions of covariates were an appropriate treatment. Furthermore, the use of random effects helped account for the spatial heterogeneity of homes through partial pooling. Finally, machine learning algorithms were investigated because of minimal assumptions about the data generating process and the possibility of complex non-linear and interaction effects. Random forests, gradient boosted machines and neural networks were adopted to fit these appraisal functions. The gradient boosted machines had the best goodness of fit, showing non-linear relationships between the structural characteristics of homes and listing prices. Partial dependence plots were able to quantify the marginal utility over the distributions of different structural characteristics. The results show that larger sized homes do not necessarily yield a premium and a diminished return is evident, similar to the results of the hierarchical generalised additive models. The variable importance plots showed that location was the most important predictor followed by the number of bathrooms and the size of a home. The gradient boosted machines achieved the lowest out of sample error and were used to develop the residential property price index. A chained, dual imputation Fisher index was applied to the gradient boosted machines showing nominal and real price developments at a country and provincial level. The chained, dual imputation Fisher index provided less noisy estimates than a simple median mix adjusted index. Although listing prices were used and not transacted prices, the trend was similar to the ABSA Global Property Guide. In order to make this research useful to property market participants, a web application was developed to show how the proposed methodology can be democratised by property portals and real estate agencies. The Listing Price Index Calculator was created to easily communicate the results through a front-end interface, showing how property portals and real estate agencies can leverage their data to aid sellers in determining listing prices to go to market with, help buyers obtain an average estimate of the home they wish to purchase and guide property market participants on price developments.