Methodological Issues in the Applicability of Hedonic Models in House Price Measurement: A Review

Abstract

Accurate measurement of changes in housing prices is key to understanding the efficiency of the housing market. This paper therefore examines methodological issues in applying hedonic regression approach in housing market analyses and its drawbacks (model misspecification, inappropriate choice of functional form, multi-collinearity and omitted variable problem) hedonic models provide reliable measure of house prices and are likely to increase the decision making ability of policy makers and professional practice of surveyors when large datasets of similar properties and their attributes are available. This paper therefore concludes that hedonic models should be used in conjunction with other valuation methods as they provide valuers with additional information in the valuation process.