Property valuation: the hedonic pricing model: the application of search-and-matching models
| DOI | https://doi.org/10.1108/JPIF-12-2020-0138 |
| Published date | 01 January 2021 |
| Date | 01 January 2021 |
| Pages | 68-76 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Gaetano Lisi |
Education Briefing
Property valuation: the hedonic
pricing model: the application of
search-and-matching models
Gaetano Lisi
Economics, eCampus University, Novedrate, Italy
Abstract
Purpose –The aim of this education briefing is to comment upon how basic hedonic pricing models for the
valuation of property can be expanded and developed. In this case, the briefing illustrates the use of the new
economic approach to the analysis of housing markets, namely the search-and-matching models.
Design/methodology/approach –This education briefing discusses the connection of two important
economic theories: the hedonic price theory and the search-and-matching theory.
Findings –This education briefing gives an example of a (non-linear) form of the hedonic price function.
Practical implications –In cases of mass appraisals, hedonic pricing models can provide a broad indication
of value across submarkets and this education briefing demonstrates a theoretical model that can be used to
provide a theoretical groundwork for the use of a concave hedonic price function in empirical estimates.
Originality/value –This education briefing shows how basic hedonic pricing models can be enhanced by a
search-and-matching approach to determine property values.
Keywords Housing prices, Hedonic price theory, Search-and-matching models, House search process,
Trading frictions
Paper type Technical paper
Introduction
In the previous education briefing (Lisi, 2019), we looked at the general use of hedonic pricing
as a property valuation model. In that briefing, it was seen that hedonic pricing models are a
quantitative representation of the thought process of a property valuer as they value a
property by the market approach by adopting a framework of allocating value to the
component characteristics of the property.
When valuing a property, hedonic pricing determines house prices by linking value to the
importance and impact of certain variables such as location, specification or environmental
characteristics. Through regression analysis, the importance and weight of these variables
and their influence on the overall value of a property can be determined and used to predict
the value of a subject property or properties.
One of the issues with hedonic price theory is that it relies upon the nonlinearity of the
hedonic price function, But in this briefing, we look at how this basic model can be developed
through the use of an economic approach to the analysis of housing markets through search-
and-matching models.
Hedonic pricing models
The economic theory of hedonic prices (Lancaster, 1966;Rosen, 1974;Epple, 1987) is well
known and not in question. However, it provides little theoretical guidance on the appropriate
functional relationship between house prices and housing characteristics (the so-called
JPIF
40,1
68
The author is highly indebted to the Editor, Professor Nick French, for the invaluable remarks which
have significantly improved the paper.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 5 December 2020
Revised 12 December 2020
Accepted 12 December 2020
Journal of Property Investment &
Finance
Vol. 40 No. 1, 2022
pp. 68-76
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-12-2020-0138
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