Do peer effects shape property values?

Do peer effects shape property values? Purpose – Both hedonics and the traditional sales comparison approach are derived from a similar paradigm with respect to how prices, hence market values, are determined. While the hedonic approach 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. This paper seeks to develop a 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 conclusion that the comparable sales approach, as used in traditional appraisal practice, is valid, although its application is typically flawed by the too small sample size generally used by appraisers. Further investigation is still needed, however, in order to find out which submarket delineation should be used to obtain optimal model performances. 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1463-578X
DOI
10.1108/14635781111150376
Publisher site
See Article on Publisher Site

Abstract

Purpose – Both hedonics and the traditional sales comparison approach are derived from a similar paradigm with respect to how prices, hence market values, are determined. While the hedonic approach 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. This paper seeks to develop a 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 conclusion that the comparable sales approach, as used in traditional appraisal practice, is valid, although its application is typically flawed by the too small sample size generally used by appraisers. Further investigation is still needed, however, in order to find out which submarket delineation should be used to obtain optimal model performances. 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.

Journal

Journal of Property Investment & FinanceEmerald Publishing

Published: Jul 12, 2011

Keywords: Hedonic price modelling; Peer effect models; Property values; Asset valuation; Property

References

  • Model comparison and model validation issues in empirical work on urban density functions
    Anselin, L.; Can, A.
  • Properties of tests for spatial dependence in linear regression models
    Anselin, L.; Rey, S.
  • Incorporating spatial variation in housing attribute prices: a comparison of geographically weighted regression and the spatial expansion method
    Bitter, C.; Mulligan, G.F.; Dall'Erba, S.
  • Sorting out access and neighbourhood factors in hedonic price modelling
    Des Rosiers, F.; Thériault, M.; Villeneuve, P.‐Y.
  • Spatial autocorrelation and the selection of simultaneous autoregressive models
    Kissling, W.D.; Carl, G.
  • Tiebout sorting aggregation and estimation of peer group effects
    Rivkin, S.G.
  • Modelling interactions of location with specific value of housing attributes
    Thériault, M.; Des Rosiers, F.; Villeneuve, P.; Kestens, Y.

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