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Real Estate Pricing Models: Theory, Evidence, and Implementation

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  • Hiroshi Ishijima
  • Akira Maeda

Abstract

We construct a theory of real estate pricing that is directly applicable to empirical analysis. Using a dynamic portfolio optimization strategy, we first show that under defined technical conditions, the theoretical equilibrium price of a piece of real estate can be described as a linear combination of attributes common to all pieces of real estate. However, in the absence of such technical conditions, i.e., under more realistic circumstances, real estate prices may diverge from their theoretical equilibrium prices. This logical consideration suggests the utility of extending the classical hedonic model, specifically to a mixed effect model developed with the application of the Box–Cox transformation. By using our model to analyze data obtained from Japanese Real Estate Investment Trust (J-REIT) records, we demonstrate our model’s ability to yield accurate results. By using our model to develop Real Estate Valuation Maps, an online valuation and mapping tool that appraises real estate prices and their associated risks, we demonstrate our model’s utility. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Hiroshi Ishijima & Akira Maeda, 2015. "Real Estate Pricing Models: Theory, Evidence, and Implementation," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 22(4), pages 369-396, November.
    • Handle: RePEc:kap:apfinm:v:22:y:2015:i:4:p:369-396
    DOI: 10.1007/s10690-013-9170-7
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    References listed on IDEAS

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    1. Feenstra, Robert C, 1995. "Exact Hedonic Price Indexes," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 634-653, November.
    2. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2004. "Identification and Estimation of Hedonic Models," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 60-109, February.
    3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    4. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    5. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    6. Epple, Dennis, 1987. "Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 59-80, February.
    7. repec:dau:papers:123456789/6486 is not listed on IDEAS
    8. Matthew J. Gurka & Lloyd J. Edwards & Keith E. Muller & Lawrence L. Kupper, 2006. "Extending the Box–Cox transformation to the linear mixed model," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 169(2), pages 273-288, March.
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    Cited by:

    1. Ma. Janice J. Gumasing & Renée Hannah A. Niro, 2023. "Antecedents of Real Estate Investment Intention among Filipino Millennials and Gen Z: An Extended Theory of Planned Behavior," Sustainability, MDPI, vol. 15(18), pages 1-35, September.

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