It can also be used to assess the value of a property, in the absence of specific market transaction data, and to analyze the demand for various housing characteristics, as well as housing demand in general. As with CPI calculations, Hedonic pricing can be used to correct for quality changes in constructing a housing price index.

This information can be used to construct a price index that can be used to compare the price of housing in different cities or to do time series analysis. A hedonic regression equation treats these attributes (or bundles of attributes) separately, and estimates prices (in the case of an additive model) or elasticity (in the case of a log model) for each of them. Instead, it is assumed that a house can be decomposed into characteristics such as its amount of bedrooms, the size of its lot, or its distance from the city center.

Because individual buildings are so different, it is difficult to estimate the demand for buildings generically. In real estate economics, Hedonic regression is used to adjust for the issues associated with researching a good that is as heterogeneous, such as buildings. Hedonic models and real estate valuation Price changes that are due to substitution effects are subject to hedonic quality adjustments. In CPI calculations, hedonic regression is used to control the effect of changes in product quality. Hedonic models are commonly used in real estate appraisal, real estate economics and Consumer Price Index (CPI) calculations. Hedonic models can accommodate non-linearity, variable interaction, and other complex valuation situations. Hedonic models are most commonly estimated using regression analysis, although some more generalized models such as sales adjustment grids are special cases which do not.Īn attribute vector, which may be a dummy or panel variable, is assigned to each characteristic or group of characteristics. This requires that the composite good (the item being researched and valued) can be reduced to its constituent parts and that those resulting parts are in some way valued by the market. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value for each. In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value.

JSTOR ( November 2022) ( Learn how and when to remove this template message).

Unsourced material may be challenged and removed.įind sources: 'Hedonic regression' – news Please help improve this article by adding citations to reliable sources. This article needs additional citations for verification.

Hedonics