Abstract
Hedonic pricing method (HPM), which is commonly used for estimating real estate property values, considers the property’s internal and external characteristics for its valuation. Despite its popularity, however, the method lacks the mechanism that directly reflects the target property’s price fluctuation and the real estate market’s volatility over time. To overcome these limitations, we propose Pseudo Self Comparison Method (PSCM), which reduces the real estate valuation problem to finding a pseudo self, which is defined as a housing property that can most closely approximate the characteristics of the target housing property, and adjusting its previous transaction price to be in sync with the real estate market change. The proposed PSCM is tested for two scenarios in which the volatility of the real estate market varies greatly, using the transaction data compiled from Seoul, the capital of South Korea, and its surrounding region, Gyeonggi. The study results show almost five times lower estimation errors when predicting housing transaction prices using the PSCM compared to the HPM in both scenarios and in both areas. The proposed method is particularly useful for mass valuation of apartments or densely located housing units.
Highlights
Research has been extensively conducted to accurately estimate actual housing transaction prices while the importance of accurate valuation has become apparent in recent years
In this study, we propose Pseudo Self Comparison Method (PSCM), which reduces the real estate valuation problem to finding a pseudo-self, which is defined as a housing property that can most closely approximate the characteristics of the target housing property, and adjusting its previous transaction price to be in sync with the real estate market change
The models based on the Pseudo Self Comparison Method (PSCM) show that they can effectively reflect the dynamic changes of the real-estate market
Summary
Research has been extensively conducted to accurately estimate actual housing transaction prices while the importance of accurate valuation has become apparent in recent years. The inaccurate valuation of real estate can trigger a collective panic by the investors, causing losses in financial institutions and increasing economic danger [5]. The subprime mortgage crisis started with the United States’ policy to boost the stagnant economy in an economic downturn that incentivized mortgage loans with low interests, which led to an increase in housing prices. The trend of rising housing prices, combined with the low mortgage interest, guaranteed the financial institutions a safety net even when a borrower filed for bankruptcy. This allowed for more lenient loan regulations and valuations of real estate. As the housing bubble started to burst in 2004 when the low-interest policy ended, low-income borrowers were unable to make payments as the subprime mortgage loan interest rose
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