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In Figure 2, it can be seen that there is no negative values found in the de-lagged OPI in the period 1990-2002, when quarterly data is used. Though the deviations between the observed OPI and the de-lagged OPI are not that noticeable, it can be discerned that the observed OPI tend to overstate the "true" value when prices are going up, and vice versa. This is in line with the Singapore study over the same period of time. It is reasonable to say that the economic condition in a particular time frame determines the trend of appraisal-based price index values. When different periods of time are studied, it may induce various outcomes. In other words, it is uncertain that whether an appraisal-based values/returns would either overstate or understate its "true" values. The main deciding item of such is the economic trend at the time.
Furthermore, to see if the de-lagged OPI is more informational than the observed OPI, correlation tests are carried out, comparing the de-lagged values (3-month, 6-month, 9-month, and 12-month lagging patterns) to the Hang Seng Property Index. The quarterly average of such index is used for comparison, and the results are shown in Table 7.
It can be observed that with the exception of OPI(2), which is under a 6-month lagging pattern, the remaining values have similar Pearson correlations with the HSPI. The delagged OPI(1) has a higher correlation with the HSPI, at 0.537, than that of the observed OPI, at 0.494. It can be concluded that the OPI in Hong Kong has a 3-month lagging problem. It should be noted that the reason for the relatively low correlation values with HSPI (about one-half) is that the Hang Seng Property Index essentially represents companies specializing in both residential and commercial real estates. Meanwhile, this study only focuses on the price discovery of commercial real estate, due to its relatively fewer transactions.
As expected, the lag term is within 0-12 months. However, such lag term can only be obtained when quarterly data is utilized. The point is that, it is possible that the impact, or the lag term of appraisal-based values/returns could be over-estimated during price discovery. In the Hong Kong study, it is reasonable to say that there does not seem to have a lagging problem in the OPI, as its correlation with HSPI is higher than the de-lagged OPI. It looks to be the case if the study ends there, but instead, it is discerned in the second test that lagging problem does exist in the observed OPI, only to be much less than a year. The lagging problem may be not as serious as some researches tend to inform us. In other words, part of the lagging may be induced by not only the true lagging phenomenon (insufficient transactions), but also the bias in data collection. The intention of locating lagging problems is to provide a more informational and efficient indicator of the values/returns of commercial real estate, but bias in data collection may lead to even more misleading results obtained for references.
5. CONCLUSION
The phenomenon of lagging in commercial real estate price discovery has been investigated. A study of the price dynamics of Hong Kong's office space, from 1990-2002, suggests that appraisal-based office price indices tend to overstate the "true" values when the economy is performing well, otherwise when the economy is encountering a downturn. It is different from the previous studies which provide conflicting accounts of whether appraisal-based values/returns overstate or understate its "true" values. It appears that the determinant for the above question lies in the economic conditions of the study period. Also, comparing the two study approaches, the inclusion of more economic variables (multi-variable approach) in the Hong Kong study enhances the efficiency of the estimated de-lagged index, compared to a single-index approach (LPI).
Then, this study finds that researches focusing on discovering lagging problems of appraisal-based values may not be as accurate as they are supposed to be. The reason is that bias in the data collection (or selection) process may over-estimate the impact/length of lagging problems. The Hong Kong study illustrates that there is a lagging problem of around 3 months, which in a sense cannot be detected using yearly data.
The process of de-lagging aims at providing a more efficient indicator for individuals' references regarding the leasing/purchasing of commercial real estates. However, with data collection bias put into consideration, such process may not generate a more satisfactory solution of the problem of lagging than the observed values. This paper has given some different insights on the process known as delagging of appraisal-based values/returns of commercial real estates. Much like the contemporary studies on price discovery, it is hardly convincing to say that the phenomenon of lagging does not exist at all. The concern is towards the extent of price index lagging, which can be varied by means of data selection and bias. Appraisal-based price indices or returns are lagged, but it is shown that those values may not be as "non-trustworthy" as we are led to believe.
Acknowledgements
This work was supported by the grants from the Hong Kong Polytechnic University (Project Codes: A-PG39 and Z02Z).
Received 30 November 2006; accepted 15 February 2007
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