Essay Evaluation Of Hedonic Price Model

1607 Words Nov 22nd, 2016 7 Pages
4. Methodology

4.1. Analytical Framework (Generalized Spatial Two-Stage Least Square: GS2SLS)

Hedonic price model has been developed and widely used to identify the factors explaining housing prices (Malpezzi, 2003). In this study, we deal with additional two statistical issues such as endogeneity between land use and housing price and spatial autocorrelation between housing prices. First, endogeneity should be carefully accounted for when measuring the effect of land use on housing prices because a simultaneous relationship between land use and housing prices exists. For example, better accessibility or high levels of mixed land use increase housing prices because such land use features bring about more activities - firms are encouraged to move in and thus more facilities will be constructed. As a result, it increases housing demands surrounding the areas, and thus raises housing prices. This relationship can be expressed as the following equation.

P=f(L,X)+ϵ (1)

where P denotes housing prices, L denotes land use characteristics, X denotes exogenous factors affecting housing prices, and ϵ denotes error terms. However, as the land use characteristics affect housing prices, the increased housing prices simultaneously bring about more demands of development. Thus, the increased housing prices lead to an increase in the commercial development. This relationship can be expressed as the following equation.

L=f(P,X)+μ (2)

In order to account for the…

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