The Pursuit of Preferences: A Hedonic Real Estate Appraisal

Abstract

This study modifies the hedonic Builder’s Model through assigning specific variable distributions, in an attempt to appraise individual real estates. Using data from six different submarkets surrounding Gothenburg, we first calibrated a pooled constrained F-test to determine that the submarkets should be estimated individually. Marginal prices were then estimated to confirm the model’s economic significance as they reflected the submarkets’ descriptive statistics. After economic confidence was established, we estimated Tobin’s Q and saw that four submarkets were trading at a premium. However, fundamental economic factors such as low interest rates and scarcity of land motivates the premium and neglects the suggestion of an overvaluation. Lastly, an out-of-sample post hoc forecast was calibrated with a log-log model used as a reference model. Our model does not statistically outperform the reference model albeit the lower absolute residuals and volatility. When analyzing the forecast results, we found that misleading input data and the lack of time to fully calibrate the model were the most important factors interfering with our results.