Application of The Hedonic Pricing Method
While studying the application of the Hedonic Pricing Method, the first assumption made is the value of a house is affected by a particular combination of characteristics that it possesses given that properties with better qualities demand higher prices as compared to properties with lower qualities. This is the Hedonic Pricing Function.
The price of a house will thus be affected by the structural characteristics (s1, s2, s3...) of the house itself, characteristics of the locality/neighbourhood (n1, n2, n3...), and environmental characteristics (e1, e2, e3...)
Structural Characteristics could be anything from size of the house, to the number of rooms, type of flooring, etc. Neighbourhood attributes include variables like posh-ness of the locality, quality of roads, etc. And the environmental characteristics are variables such quality of air, proximity to parks, beaches, dumping yards, etc.
The analysis takes place in two stages. The first stage involves employing regression techniques to estimate the Hedonic Price Function of the property. This function will relate the prices of many properties in the same housing area to the different characteristics.
So Price Function (P) = f (s1, s2, s3...sj; n1, n2, n3,...nj; e1, e2, e3,...ej) This function could be linear or non-linear. The prices may change at an increasing or decreasing rate when the characteristics change.
When you now differentiate the price function with respect to any one of the above characteristics, the implicit price function for that particular characteristic is yielded. It is considered implicit because the price function is indirectly revealed to us by what the people are willing to pay in order to obtain better quality or quantities of the characteristic.
In the second stage, these implicit prices are regressed against the actual quantities/qualities chosen by the people in order to attain the marginal willingness to pay for the amenity. The results of this analysis will indicate the changes in property values for a unit change in each characteristic, given that all the other characteristics are constant. Some variables however may be correlated. This will result in similar changes in their values.
Read more about this topic: Hedonic Regression
Famous quotes containing the words application of the, application of, application and/or method:
“The best political economy is the care and culture of men; for, in these crises, all are ruined except such as are proper individuals, capable of thought, and of new choice and the application of their talent to new labor.”
—Ralph Waldo Emerson (1803–1882)
“My business is stanching blood and feeding fainting men; my post the open field between the bullet and the hospital. I sometimes discuss the application of a compress or a wisp of hay under a broken limb, but not the bearing and merits of a political movement. I make gruel—not speeches; I write letters home for wounded soldiers, not political addresses.”
—Clara Barton (1821–1912)
“I conceive that the leading characteristic of the nineteenth century has been the rapid growth of the scientific spirit, the consequent application of scientific methods of investigation to all the problems with which the human mind is occupied, and the correlative rejection of traditional beliefs which have proved their incompetence to bear such investigation.”
—Thomas Henry Huxley (1825–95)
“If all feeling for grace and beauty were not extinguished in the mass of mankind at the actual moment, such a method of locomotion as cycling could never have found acceptance; no man or woman with the slightest aesthetic sense could assume the ludicrous position necessary for it.”
—Ouida [Marie Louise De La Ramée] (1839–1908)