Property valuation: the hedonic pricing model – location and housing submarkets

DOIhttps://doi.org/10.1108/JPIF-07-2019-0093
Pages589-596
Date02 September 2019
Publication Date02 September 2019
AuthorGaetano Lisi
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Property valuation: the hedonic
pricing model location and
housing submarkets
Gaetano Lisi
Department of Economics, e-Campus University, Novedrate, Italy
Abstract
Purpose The purpose of this paper is to comment upon the use of hedonic pricing models for the valuation
of property. This model can be particularly useful for some housing markets.
Design/methodology/approach This Education Briefing is an explanation of the how hedonic pricing
can be useful in looking at the effect of locationon the house prices within different submarkets using the
Italian real estate market as an example.
Findings Although, this case study is relatively straightforward, it shows how the application of the
market approach can provide insights in cases where the comparable properties belong to different
submarkets with relatively few transactions.
Practical implications In cases of mass appraisals, hedonic pricing models can provide a broad
indication of value across submarkets.
Originality/value This paper develops a general framework that connects multiple regression analysis,
direct comparison model and submarket binary variables.
Keywords Location, Sales comparison, Binary variables
Paper type General review
Introduction
In this Education Briefing, we are looking at the use of hedonic pricing as a property
valuation model. Hedonic price theory[1] suggests that the price of a composite good (such
as housing) crucially depends on its intrinsic and extrinsic characteristics, each of which can
be evaluated independently. Indeed, the characteristics of a composite good are known as
hedonic, because their monetary values can be evaluated only indirectly through the
overall price of the good. In many ways hedonic pricing models are a quantitative
representation of the thought process of a property valuer as they value a property by the
market approach.
Valuation approaches
The market approach is one of three valuation approaches adopted by International
Valuation Standards of the International Valuation Standards Council (International
Valuation Standards Council (IVSC) 2017). The market approach provides an indication of
value by comparing the subject asset with identical or similar assets for which price
information is available.
An approach is the first level in a hierarchy of definitions. The three recognised
approaches are income, cost and market. All of these are based on the underlying economic
principles of price formation and the choice of approach will vary depending on the purpose
and nature of the valuation (see French and Gabrielli, 2018).
Each of these principal valuation approaches includes different detailed methods of
application and within these methods, there are different models. The comparable method,
as it names suggests, determines the price of the subject property by comparison to Journal of Property Investment &
Finance
Vol. 37 No. 6, 2019
pp. 589-596
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-07-2019-0093
Received 14 July 2019
Revised 14 July 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The author is highly indebted to the Editor, Professor Nick French, for the invaluable remarks which
have significantly improved the paper.
589
Property
valuation

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