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Real Estate Pricing Models: Theory, Evidence, and Implementation

Real Estate Pricing Models: Theory, Evidence, and Implementation 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Financial Markets Springer Journals

Real Estate Pricing Models: Theory, Evidence, and Implementation

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Publisher
Springer Journals
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics; Finance/Investment/Banking; Macroeconomics/Monetary Economics//Financial Economics; International Economics; Econometrics; Economic Theory
ISSN
1387-2834
eISSN
1573-6946
DOI
10.1007/s10690-013-9170-7
Publisher site
See Article on Publisher Site

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.

Journal

Asia-Pacific Financial Markets – Springer Journals

Published: Apr 13, 2013

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