Definitions in this
text:
Geographical
Information System (GIS)
Reference:
a hedonic valuation study using 1996 housing transactions
Regression
Analysis
|
Methods, Section 3
Hedonic Pricing Method
-
Overview
-
Why Use the
Hedonic Pricing Method?
-
Application
of the Hedonic Pricing Method
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An Example
Application of Hedonic Valuation・Values of Environmental Amenities
in Southold, Long Island
-
Summary of
the Hedonic Pricing Method
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Applying the
Hedonic Pricing Method Using Housing Prices
-
Advantages
of the Hedonic Pricing Method
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Issues
and Limitations
Overview
The hedonic pricing method is used to estimate
economic values for ecosystem or environmental services that directly affect
market prices. It is most commonly applied to variations in housing
prices that reflect the value of local environmental attributes.
It can be used to estimate economic benefits
or costs associated with:
-
environmental quality, including air pollution,
water pollution, or noise
-
environmental amenities, such as aesthetic
views or proximity to recreational sites
The basic premise of the hedonic pricing method
is that the price of a marketed good is related to its characteristics,
or the services it provides. For example, the price of a car reflects
the characteristics of that car・transportation, comfort, style, luxury,
fuel economy, etc. Therefore, we can value the individual characteristics
of a car or other good by looking at how the price people are willing to
pay for it changes when the characteristics change. The hedonic pricing
method is most often used to value environmental amenities that affect
the price of residential properties.
This section continues with an example
application of the hedonic pricing method, followed by a more complete
technical description of the method and its advantages and limitations.
Hypothetical Situation:
Agency staff want to measure the benefits
of an open space preservation program in a region where open land is rapidly
being developed.
Why Use the Hedonic Pricing Method?
The hedonic pricing method was selected
in this case because:
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Housing prices in the area appear to
be related to proximity to open space.
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Data on real estate transactions and
open space parcels are readily available, thus making this the least expensive
and least complicated approach.
Alternative Approaches:
If the open space of concern is used mainly
for recreation, the travel cost method might be used. Alternatively,
survey-based methods, like contingent valuation or contingent choice, might
be used. However, these methods would generally be more difficult
and expensive to apply.
Application of the Hedonic Pricing
Method:
Step 1:
The first step is to collect data on residential
property sales in the region for a specific time period (usually one year).
The required data include:
-
selling prices and locations of residential
properties
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property characteristics that affect selling
prices, such as lot size, number and size of rooms, and number of bathrooms
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neighborhood characteristics that affect selling
prices, such as property taxes, crime rates, and quality of schools
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accessibility characteristics that affect
prices, such as distances to work and shopping centers, and availability
of public transportation
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environmental characteristics that affect
prices
In this case, the environmental characteristic
of concern is the proximity to open space. The researcher might collect
data on the amount and type of open space within a given radius of each
property, and might also note whether a property is directly adjacent to
open space. Often, this type of data may be obtained from computer-based
GIS
(geographical information systems) maps. Data on housing prices and
characteristics are available from municipal offices, multiple listing
services, and other sources.
Step 2:
Once the data are collected and compiled,
the next step is to statistically estimate a function that relates property
values to the property characteristics, including the distance to open
space. The resulting function measures the portion of the property
price that is attributable to each characteristic. Thus, the researcher
can estimate the value of preserving open space by looking at how the value
of the average home changes when the amount of open space nearby changes.
How Do We Use the Results?
The results can be used to evaluate agency
investments in open space preservation. For example, specific parcels
may be under consideration for protection. The hedonic value function
can be used to determine the benefits of preserving each parcel, which
can then be compared to the cost.
Case Study Example of the Hedonic Pricing
Method・Values of Environmental Amenities in Southold, Long Island [ref.]
The Situation
The town of Southold, Long Island, New
York has coastlines on both the Peconic Bay and Long Island Sound.
Compared to the rest of Long Island, it is a relatively rural area, with
a large amount of farmland. However, population and housing density
are rapidly increasing in the town, resulting in development pressures
on farmland and other types of open space.
The Challenge
The Peconic Estuary Program is considering
various management actions for the Estuary and surrounding land areas.
In order to assess some of the values that may result from these management
actions, a hedonic valuation study was
conducted, using 1996 housing transactions.
The Analysis
The study found that the following variables
that are relevant for local environmental management were had significant
effects on property values in Southold:
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Open Space: Properties adjacent to open
space had, on average, 12.8% higher per-acre value than similar properties
located elsewhere.
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Farmland: Properties located adjacent
to farmland had, on average, 13.3% lower per-acre value. Property
values increased very slightly with greater distance from farmland.
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Major Roads: Properties located within
20 meters of a major road had, on average, 16.2% lower per-acre value.
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Zoning: Properties located within an
area with two- or three-acre zoning had, on average, 16.7% higher per-acre
value.
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Wetlands: For every percentage point
increase in the percent of a parcel classified as a wetland, the average
per-acre value increased by .3%.
The Results
Based on the results of this study, managers
could, for example, calculate the value of preserving a parcel of open
space, by calculating the effects on property values adjacent to the parcel.
For a hypothetical simple case, the value of preserving a 10 acre parcel
of open space, surrounded by 15 ・average・ properties, was calculated as
$410,907.
Summary of the Hedonic Pricing Method:
The hedonic pricing method is used to estimate
the value of environmental amenities that affect prices of marketed goods.
Most applications use residential housing prices to estimate the value
of environmental amenities. The method is based on the assumption
that people value the characteristics of a good, or the services it provides,
rather than the good itself. Thus, prices will reflect the value
of a set of characteristics, including environmental characteristics, that
people consider important when purchasing the good.
The hedonic pricing method may be used
to estimate economic benefits or costs associated with:
-
environmental quality, including air pollution,
water pollution, or noise
-
environmental amenities, such as aesthetic
views or proximity to recreational sites
The hedonic pricing method is relatively straightforward
and uncontroversial to apply, because it is based on actual market prices
and fairly easily measured data. If data are readily available, it
can be relatively inexpensive to apply. If data must be gathered
and compiled, the cost of an application can increase substantially.
Applying the Hedonic Pricing Method
Using Housing Prices:
In general, the price of a house is related
to the characteristics of the house and property itself, the characteristics
of the neighborhood and community, and environmental characteristics.
Thus, if non-environmental factors are controlled for, then any remaining
differences in price can be attributed to differences in environmental
quality. For example, if all characteristics of houses and neighborhoods
throughout an area were the same, except for the level of air pollution,
then houses with better air quality would cost more. This higher
price reflects the value of cleaner air to people who purchase houses in
the area.
To apply the hedonic pricing method, the
following information must be collected:
-
A measure or index of the environmental amenity
of interest.
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Cross-section and/or time-series data on property
values and property and household characteristics for a well-defined market
area that includes homes with different levels of environmental quality,
or different distances to an environmental amenity, such as open space
or the coastline.
The data are analyzed using regression
analysis , which relates the price of the property to its characteristics
and the environmental characteristic(s) of interest. Thus, the effects
of different characteristics on price can be estimated. The regression
results indicate how much property values will change for a small change
in each characteristic, holding all other characteristics constant.
The analysis may be complicated by a number
of factors. For example, the relationship between price and characteristics
of the property may not be linear ・ prices may increase at an increasing
or decreasing rate when characteristics change. In addition, many of the
variables are likely to be correlated, so that their values change in similar
ways. This can lead to understating the significance of some variables
in the analysis. Thus, different functional forms and model specifications
for the analysis must be considered.
Advantages of the Hedonic Pricing Method:
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The method・s main strength is that it can
be used to estimate values based on actual choices.
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Property markets are relatively efficient
in responding to information, so can be good indications of value.
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Property records are typically very reliable.
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Data on property sales and characteristics
are readily available through many sources, and can be related to other
secondary data sources to obtain descriptive variables for the analysis.
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The method is versatile, and can be adapted
to consider several possible interactions between market goods and environmental
quality.
Issues and Limitations:
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The scope of environmental benefits that can
be measured is limited to things that are related to housing prices.
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The method will only capture people・s willingness
to pay for perceived differences in environmental attributes, and their
direct consequences. Thus, if people aren・t aware of the linkages
between the environmental attribute and benefits to them or their property,
the value will not be reflected in home prices.
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The method assumes that people have the opportunity
to select the combination of features they prefer, given their income.
However, the housing market may be affected by outside influences, like
taxes, interest rates, or other factors.
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The method is relatively complex to implement
and interpret, requiring a high degree of statistical expertise.
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The results depend heavily on model specification.
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Large amounts of data must be gathered and
manipulated.
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The time and expense to carry out an application
depends on the availability and accessibility of data.

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