A Framework For Analysing House Prices Using Time, Space And Quality Criteria

The purpose of this paper is to link temporal, spatial and quality aspects of house prices within a single analytical framework. The hedonic price model, derived mostly from Lancasterís (1966) consumer theory and Rosenís (1974) model implies that commodities are characterized by their constitute properties, therefore the value of a commodity can be calculated by adding up the estimated values of its separate properties. These hedonic price indices provide a basis to estimate the house price taking into account the quality or the characteristics of a housing unit. Furthermore, the standard urban economic monocentric model developed initially by Alonso (1964) suggests that the principal variable causing variations in constant-quality house prices within a metro area is land price. A typical land rental equation includes distance from the CBD, agricultural land rental, and a conversion parameter that depends on transport cost per mile and community income, and hence suggests that distance to the CBD should be included in the house price model. In addition, literature related to temporal dynamics of house prices justify adding-in a time variable as a determinant of house prices: even though it is widely accepted that house prices are sensitive to the temporal dynamics, they are hardly incorporated into the hedonic models. Inclusion of temporal dimension allows capturing the time related dynamics of the market such as volatile prices generated by seasonality or the price cycles. Most of the previous analyses of house prices do not typically take into account these three dimensions jointly so that the estimates produced are likely to be biased. The composite model suggested here will reflect temporal and spatial dimensions in addition to the quality of the house represented by its intrinsic characteristics. The estimates of the proposed model, therefore, are likely to be unbiased. An attempt is also made to substantiate or invalidate these claims by conducting tests based on simulations.