Do peer effects shape property values?
| Pages | 510-528 |
| Date | 12 July 2011 |
| DOI | https://doi.org/10.1108/14635781111150376 |
| Published date | 12 July 2011 |
| Author | François Des Rosiers,Jean Dubé,Marius Thériault |
| Subject Matter | Property management & built environment |
Do peer effects shape property
values?
Franc¸ois Des Rosiers
Urban & Real Estate Management, Faculty of Business Administration,
Laval University, Quebec City, Canada
Jean Dube
´
De
´partement socie
´te
´s, territoires et de
´veloppement,
Universite
´du Que
´bec a
`Rimouski (UQAR), Rimouski, Canada, and
Marius The
´riault
Graduate School of Land Planning and Regional Development, Laval University,
Quebec City, Canada
Abstract
Purpose – Both hedonics and the traditional sales comparison approach are derived from a similar
paradigm with respectto how prices, hence market values,are determined. While the hedonicapproach
can provide reliable estimates of individual attributes’ marginal contribution,it may – unlike the sales
comparisonapproach – underestimatethe prominent influencethat surrounding propertiesexert on any
given nearby housingunit and sale price. This paper seeks to developa simple method for reconciling
the two approaches within a rigorous conceptual and methodological framework.
Design/methodology/approach – Peer effect models, an analytical device developed, and mainly
used, by labour economists, are adapted to the hedonic price equation so as to incorporate nearby
properties’ influences, thereby controlling for non-observable neighbourhood effects. In addition to
basic, intrinsic, building and land attributes, the ensuing model accounts for three types of effects,
namely endogenous interactions effects (i.e. comparable sales influences, or peer effects), exogenous, or
neighbourhood, effects and, finally, spatial autocorrelation effects.
Findings – Preliminary findings suggest that integrating peer effects in the hedonic equation allows
bringing out the combined impacts of endogenous, exogenous and spatially correlated effects in the
house price determination process, with spatial autocorrelation of model residuals being significantly
reduced, even without resorting to a spatial autoregressive procedure.
Research limitations/implications – Further investigation is still needed in order to find out
which submarket delineation should be used to obtain optimal model performances.
Originality/value – The paper leads to the conclusionthat the comparable sales approach,as used in
traditional appraisal practice, is valid, although its application is typically flawed by the too small
sample size generallyused by appraisers. Further investigationis still needed, however, in order to find
out which submarketdelineation should be used to obtain optimal modelperformances. This raises the
paramount question as to whether the peer effect variable is adequately measured and addresses the
tricky issue of kernel determination in spatial statistics and related applications, such as GWR.
Keywords Hedonic price modelling, Peer effect models,Property values, Asset valuation,Property
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
This research was funded by the Canadian SSHRC (Social Sciences and Humanities Research
Council) and by the Quebec Research Fund on Society and Culture (FQRSC). Authors are grateful
to Quebec City’s Assessment Service for giving them access to the 1986-1996 home transactions
database.
All three authors are regular members of Laval University’s Centre de Recherche en
Ame
´nagement et De
´veloppement (CRAD).
JPIF
29,4/5
510
Received December 2010
Accepted March 2011
Journal of Property Investment &
Finance
Vol. 29 No. 4/5, 2011
pp. 510-528
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781111150376
1. Context and objective of research
Under the hedonic theory (Rosen, 1974), the market price of a complex good (car,
housing, etc) may, under a series of assumptions, be broken down into its attributes’
marginal contributions, with the shadow, or implicit, prices of attributes also reflecting
the willingness-to-pay (WTP) of buyers. In the case of housing, property attributes
include building and land intrinsic, physical characteristics (size, age, quality, presence
of a garage, etc) as well as a series of exogenous location, neighbourhood and
environmental attributes. Under traditional appraisal standards, comparable sales[1]
of nearby properties, assumed to bear greater resemblance to a subject property than
sales located further away, are used in order to derive a reliable market value.
Although the hedonic framework can be said to vary substantially from the
traditional sales comparison approach used in real estate appraisal in that the former
rests on much stronger conceptual grounds than the latter while benefiting from large
transaction samples that enable statistical inference, both are derived from a similar
paradigm with respect to how prices, hence market values, are determined.
Consequently, the two approaches could be viewed as complementing each oth er,
each one presenting advantages and drawbacks. Thus, while the hedonic approach is
much more explicit about the determinants of property values and can provide reliable
estimates of individual attributes’ marginal contribution, it may – unlike the sales
comparison approach – underestimate the prominent influence that surrounding
properties exert on any given nearby housing unit and sale price.
Over the past 15 years, the hedonic framework has benefited from major
methodological developments, such as Geographically Weighted Regression (GWR –
Fotheringham et al., 1998, 2002), which allows local implicit prices to be derived. While
the latter accounts for the influences that neighbouring properties exert on local
implicit prices, it is not exempt from methodological flaws, which can eventually lead
to major inconsistencies (Bitter et al., 2007). In this paper, a simple method is developed
for reinserting the comparable sales concept within a rigorous theoretical and
methodological framework. It is based on peer effect models, an analytical device
developed, and mainly used, by labour economists, which we adapt to the hedonic price
equation so as to incorporate nearby properties’ influences, thereby controlling for non
observable neighbourhood effects. In addition to basic, intrinsic, building an d land
attributes, the ensuing model accounts for three types of effects, namely endogenous
interactions effects (i.e. comparable sales influences, or peer effects), exogenous, or
neighbourhood, effects and, finally, spatial autocorrelation (SA) effects.
The paper is composed of six sections. Section 2 provides a literature review on peer
effect models and their applications. The conceptual framework of peer effect models is
developed in the third section, where it is shown how the concept may be adapted to
the hedonic price equation. In the fourth section, the database used for model
calibration is presented while regression results are reported and discussed in the fifth
section. Finally, a summary of findings and concluding comments end the paper.
2. Literature review
Peer effects can be defined as the influence that members of a group exert on a given
individual in the group. While such effects seem obvious and have been mentioned in
the literature (Leibenstein, 1950; Veblen, 1899), the modern economic theory has mainly
focused on the mathematical formulation of the mechanisms underlying market
Do peer effects
shape property
values?
511
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