a critical review of literature on the hedonic price model

A Critical Review of Literature on the Hedonic Price Model

International Journal for Housing Science and Its Applications 27 (2), 145-165, 2003

18 Pages Posted: 4 Jun 2012 Last revised: 9 May 2016

341183 341183

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

1851785 1851785

affiliation not provided to SSRN

Date Written: June 12, 2002

The hedonic price model, derived from Lancaster’s (1966) consumer theory and Rosen’s theoretical (1974) model, has been used extensively in the scientific investigation of various aspects of housing markets. This paper reviews the literature on the application of the hedonic price model. Theoretical background, major empirical issues, inherent limitations, and advantages are discussed. The applicability of the model to the housing market is critically examined. Previous empirical studies of the effects of locational, structural, and neighbourhood-related housing attributes on property prices are identified and reviewed. A list of common housing attributes used in the estimation of the hedonic price models and their effects on housing prices are identified. Although the set of prices influencing characteristics is different across different markets, and the variables included in the hedonic price model are also constrained by the availability of data, this list should serve as a useful basic checklist for the application of the hedonic price model in different markets.

Keywords: Hedonic Price Model, Housing Attributes, Locational Attributes, Structural Attributes, Neighbourhood Attributes

JEL Classification: B49, R20

Suggested Citation: Suggested Citation

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The Composition of Hedonic Pricing Models: A Review of the Literature

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Thomas Dimopoulos

Purpose-The purpose of this study is to investigate how the degree of overpricing (DOP) and other variables are associated with the time on the market (TOM) and the final selling price (SP) for residential properties in the Paphos urban area. Design/methodology/approach-The hedonic pricing model was used to examine the association of TOM and SP with various factors. The association of the independent variable of DOP and other independent variables with the two dependent variables of TOM and SP were investigated via ordinary least squares (OLS) regression models. In the first set of models the dependent variable was TOM and in the second set of models the dependent variable was SP. A sample of N 5 538 completed transactions from Q1 2008 to Q2 2019 was used to estimate the optimum DOP that a seller must apply on the current market value of a property in order to achieve highest SP price in the shortest TOM. Findings-The results of this study also suggest that the degree of overpricing in thin and less transparent markets is higher than that in transparent markets with high property transaction volumes. In mature markets like the USA and the UK where the actual sold prices are published, the DOP is around 1.5% which is much lower than the 11% DOP identified in this study. Practical implications-It was found that buyers are willing to pay more for the same house in a bigger plot than a bigger house in the same plot. The outcome is that smaller houses sell faster at a higher price per square meter than larger houses. Smaller houses are more affordable than larger houses. Social implications-There is a large pool of buyers for smaller houses than bigger houses. Higher demand for smaller houses results in a higher price per square meter for smaller houses than the price per square meter for bigger houses. Respectively the TOM for smaller houses is shorter than the TOM for bigger houses. Originality/value-The database used is unique, from an estate agent located in Paphos that managed to sell more than 27,000 properties in 20 years. This data set is the most accurate information for Cyprus' property transactions.

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This study aims to review the extensive literature on the use of hedonic models (HM) for house’s price evaluation. It highlights the performance of HM, as a result of inclusion in the model of physical, neighborhood and location characteristics of the property, among others. In addition to theoretical analysis of HM specification it is explored how the HM is applied in different countries, in order to identify similarities that may arise in the application of hedonic pricing model for Tirana. Review of the literature recalls some empirical issues concerning the specification of HMs, such as segmentation and its role in HMs performance, selection of functional form of the model, as well as the selection and measurement of dependent and independent variables in the model.

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The hedonic price model introduced by Court (1939) was implemented on automobile price regression. Later the model was used for estimation and forecasting. The modification of the hedonic model by Lancaster’s (1966) consumer theory and Rosen’s theoretical (1974) model, upgraded the model to be extensively used in the scientific investigation of various aspects of housing markets. This paper reviews the theoretical background of hedonic price model and its concept. The paper further reviews the empirical issues of the application of the hedonic on housing and rental prices in the housingmarket with the critical examination. Previous empirical studies of the effects of physical structural and location of the housing property are identified and reviewed. The study relates the hedonic price model and repeat sales model for the identification of advantages and limitation over the other. The study recommends future research to critical review repeat sales model and another pricing models. Keywords: Hedonic Price model, House Price, Housing Market, Rental Price. Introduction Housing property is heterogeneous in nature. It is difficult to find two houses with exact similarity. Each property has a specific feature that makes it different from one another. The heterogeneity of housing property makes the construction of house price a

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Hedonic Price Model

• Reference work entry
• pp 2834–2837
• Cite this reference work entry

• José-María Montero 3 &
• Gema Fernández-Avilés 3  

2276 Accesses

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Nonmarketable goods, regression models

Hedonic pricing treats a marketed good, usually a house, as a sum of individual goods (characteristics or attributes) that cannot be sold separately in the market. The main objective of a hedonic pricing model is to estimate the contribution of such characteristics or attributes to the price of house. This is why they have become a core strategy to estimate the implicit prices of nonmarketable goods.

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In the two last decades, topics related with quality of life (QoL) have been paid increasing attention. It is well known that the physical, economic, and social ambiance could influence both the economic behavior of individuals and the collective well-being. Of course, the way that the above-mentioned factors influence the individual behavior is not the same for each individual (or group), and subjectivity and individual perceptions should be considered in the analysis (see Royuela, Lambiri, & Biagi, 2008 , for details).

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Anselin, L. (1988). Spatial econometrics: Methods and models . Boston: Kluwer Academic Publishers.

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Department of Statistics of the Faculty of Law and Social Sciences, University of Castile-La Mancha, Cobertizo S. Pedro Mártir, 45.071, Toledo, Spain

José-María Montero & Gema Fernández-Avilés

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Montero, JM., Fernández-Avilés, G. (2014). Hedonic Price Model. In: Michalos, A.C. (eds) Encyclopedia of Quality of Life and Well-Being Research. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-0753-5_1279

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Critical review of hedonic pricing model application in property price appraisal: A case of Nigeria

• R. Abidoye , Albert Chan
• Published 1 June 2017
• Economics, Business
• International journal of sustainable built environment

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The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

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Ronald Coase Centre for Property Rights Research

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A Critical Review of Literature on the Hedonic Price Model

Hedonic Price Model, Housing Attributes, Locational Attributes, Structural Attributes, Neighbourhood Attributes

Liquidity and Information Asymmetry in the Real Estate Market

Information asymmetry, price, volume, land value

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Externalities of Urban Renewal: A Real Option Perspective

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Housing Bubbles: A Tale of Two Cities

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Agency theory, foreclosure, hedonic price model, Hong Kong, residential properties

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Forward contract, GARCHmodel, Pre-sale, Price volatility

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air pollution, comprehensive development area (CDA), cultural attributes, environmental attributes, externality, hedonic price model, Hong Kong, land use, locational attributes, neighbourhood effects, property values, sustainable development, urban planning, view, zoning

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International Real Estate Markets

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Information Flow, Market Responses, Land Auction, Price Signals

Trading Volume-Induced Spatial Autocorrelation in Real Estate Prices

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Balcony, Environmental effect, Hedonic price model, Subsidy

Volatility Transmission in the Real Estate Spot and Forward Markets

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Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets

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Land Auctions with Budget Constraints

Auction Theory, Budget constraints, Land Auctions, Bidding Strategy

Auction Theory; Budget Constraints; Land Auctions; Bidding Strategy

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Excess Returns; Trading strategy; Search; Real Estate

Informal Land Registration Under Unclear Property Rights: Witnessing Contracts, Redevelopment, and Conferring Property Rights

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IPO, location, signaling, underpricing

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Transaction-Based Indices

Real estate price index, constant quaity index, repeat sales index, herdonic price index, transaction-based index

The Rise and Fall of the Sand Monopoly in Colonial Hong Kong

Schumpeterian innovation, transaction costs, open access property, sand, state monopoly

Repeated Planning Applications by Developers under Statutory Zoning: A Hong Kong Case Study of Delays and Design Improvements in Private Residential Development

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evidence-based practice, construction safety, AHP, sustainable risk ranking

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Hydropower Consumption, Economic Growth and Carbon Dioxide Emissions in China

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decentralization, land leasing, local officials, political career incentives, China

Policy Responses to an Overheated Housing Market: Credit Tightening Versus Transaction Taxes

Transaction tax, Loan-to-value ratio, Macroprudential measures; Repeat sales index

Separating the Age Effect From a Repeat Sales Index: Land and Structure Decomposition

Price Index; Repeat Sales; Depreciation; Land Value; Structure Value

What Motivates a Developer to Sell Before Completion?

Developers, Presale, Hedging, Institutions, Risk

What Motivates a Developer to Sell before Completion?

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Institutions and Capital Structure: The Case of Chinese Property Firms

Institutions; Capital Structure; Agency Problems; Information Asymmetries

Spatial dependence, Trading volume, Price discovery, Real Estate

Can Liquidity Explain Spatial Dependence in Real Estate Prices?