Estimation and Applications of the Hedonic Function of Housing

Abstract

AbstractThere are several limitations of the conventional housing evaluation methods comprising the cost, sales comparison, and profit return methods. The cost method considers only the cost—the supplier side—and hence it is difficult for buyers to calculate the accrued price. The sales comparison method produces an arbitrary evaluation when attributes of properties to be appraised and comparable properties are different. Additionally, there are cases when comparable or recently sold properties in the area with similar characteristics do not exist. The profit return method does not facilitate an accurate estimation of the future profits moving according to the demand and supply in the rental market. The repeat-sales method suffers from statistical bias because it is restricted to data of houses traded more than twice in a sample period. To overcome these limitations, this chapter proposes the use of hedonic housing valuation. It discusses the definition of the hedonic approach, the method of estimation using the hedonic approach, the merits of using the hedonic housing price and rent function, and the application of hedonic housing valuation and price index. Based on regression analysis, this chapter provides the way to estimate the hedonic function using the housing price and attributes of houses as explained and explanatory variables, respectively. It also regresses the hedonic function with rent and attributes of houses as explained and explanatory variables, respectively. By substituting the level of each attribute in the estimated hedonic price and rent functions, the chapter presents the price and the rent based on the level of each attribute. The results show that the quality-adjusted hedonic price and rent indices capture the transition of housing price and the movement of rents. This hedonic price valuation provides an accurate valuation of used houses, and consequentially contributes to revitalizing the used housing market. Additionally, the broad area is shown in which hedonic housing valuation and hedonic housing price index are applicable.KeywordsHedonic price functionHedonic methodHousing valuationPrice indexUsed house market