Measuring price expectations Evidence from the Spanish housing market

Purpose - The purpose of this paper is to estimate the expectations component contained in the asking price of residential property, in order to assess whether expectation plays a relevant role in house price appreciation. The paper tests the role of housing characteristics and value perception on asking price. Design/methodology/approach - The hypothesis tested in this paper is that asking price of residential properties includes an element of price expectation. The analysis utilises a valuation database of about 1,900,000 records for the Spanish housing market, each record contains information on the price that owners expect to obtain on the sale of their property and housing and neighbourhood characteristics. There are three stages to the analysis. Regression analysis is used to estimate the hedonic models and separate that part of the price arising from housing heterogeneity, a two-stage least squares model estimates the role of expectations and a metadata approach measures those characteristics that explain the change in the explanatory power of the hedonic models over time. Findings - The results show that the explanatory power of hedonic models change with time suggesting that the point in the market cycle modifies the perception of price. The results indicate that the theoretical variables which explain expectations account for about 8 per cent of price, with most of the unexplained element of asking prices due to reasons related with local market conditions. Originality/value - This paper offers two original insights. First, the paper presents analysis based on asking prices and shows how this could be used as a tool to measure house price expectations. Second, the paper provides further perspectives of the Spanish housing market based on a major database of observations.