Abstract
In most hedonic price model studies, the actual sales price of a property is employed as the dependent variable in the parametric regression analysis. Although the use of this price is pervasive, alternatives to it do exist. One such alternative is the assessed property value, which is more readily available than the actual property price. The aim of this study is to compare implicit price estimates of property characteristics (both structural and locational) based on actual sales price data and assessed property values. To this end, a seemingly unrelated regression with two hedonic price equations is used, one which employs actual market prices as the dependent variable and the other which employs assessed values. The results show that the hypothesised influence of structural and locational housing characteristics on residential property prices is the same for assessed values, and actual market prices cannot be accepted. This finding should act as a caution for hedonic practitioners not to base their conclusions and recommendations solely on the use of assessed values in hedonic price models.
Highlights
The hedonic price model is generally used to estimate the effects of non-market amenities and disamenities on adjacent property values (Rosen, 1974)
Hedonic practitioners need to be cautioned that a dependent variable other than the actual sales price may be imperfectly correlated with actual market prices (Freeman, 2003)
In line with the methodology followed by Cotteleer and Van Kooten (2012), the contribution of this paper is to provide a complete analysis and statistically test for differences in parameter estimates obtained from assessed values versus actual sales prices
Summary
The hedonic price model is generally used to estimate the effects of non-market amenities and disamenities on adjacent property values (Rosen, 1974). Hedonic practitioners need to be cautioned that a dependent variable other than the actual sales price (i.e. an assessed property value) may be imperfectly correlated with actual market prices (Freeman, 2003) If this is the case, the errors in measuring the assessed value of the structure will conceal the underlying relationships between the property values and house characteristics (i.e. biased coefficient estimates will be present in the model) (Freeman, 2003). Lenders may affect the market with their lending practices (for example, by requesting large deposits from first time buyers) (Doss & Taff, 1996) Other transactions, such as trading between relatives, may not reflect true market values either. It is recommended that all transactions that are not of arm’s-length should be excluded from the hedonic analysis (Cotteleer & Van Kooten, 2012)
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