Hedonic Regression Method is a reversion method that is used to verify the worth of goods and services by segmenting the result into basic functions and traits. It is carried out by controlling the influential value of each trait disjointedly across regression testing.
The hedonic regression is a model that places the worth and influence on both constitute factors to verify the worth of the complex result.
Hedonic methods can be described to be linear, non-linear, variable interaction, or even process additional evaluation situations of other difficulties.
Hedonic regression methods are mostly used in real estate assessment to validate the value of possessions. Real estate pricing is controlled by a change of influence that makes hedonic regression the perfect opinion tool.
Hedonic regression has a non-numeric property which means it is characterized by what is statistically known as dummy variables, and the regression coefficients signify the related traits of the production value.
Comprehensively, the hedonic model is used to approximate the special effects of alteration in the feature of a result on the value.
Hedonic regression methods are useful in the estimation of the worth of properties that are considered to be lacking in the market in a particular period of time. The pricing policies are vital, especially in the building price relatives.
The Hedonic Regression Method is based on the theory of price relation which states that the price of an asset is a function of its computable traits, which can be strategized in a regression model to verify in what way the value changes with respect to alternation in each trait.
This possession’s traits vary according to the asset but do not involve numerous components, which include speed, location, weight, color, power, form, size, and so on.
Hedonic methods are useful in formulating consumer price indices (CPI). Statistically, Consumer Price Index (CPI) is a degree of the collective value level in a nation.
The CPI comprises a package of similar acquired by operating the hedonic model in order to regulate the changes in traits between varieties of goods in computing the CPI.
Application of Hedonic Regression Method
The hedonic regression method is typically used in the concept of Real Estate Pricing. It helps in the estimation of the value of property in the real estate sector.
The hedonic regression model assumes that property values will reveal the importance of traits that are useful and significantly valuable for purchase.
The data is examined using hedonic regression methods to ascertain the influence that a change of traits will have on the price of the property in view.
The regression results are also applicable to designate the worth of properties that may change depending on the exhibition of the traits, all things being equal.
Thereafter, collections in the analysis can be derived as an influence such that the connection between the price and its traits cannot be classified as being linear.
This is due to the fact that the property prices will intensify but at a declining or cumulative rate only when there exist changes in the trait.
Hedonic regression methods are applicable to property pricing for instance most contributors may gather facts or data especially when it is for a predetermined period involving property sales. The property sales must possess the following features.
It must possess the Property selling prices
The locations of the property must be stated
The Property traits must be stated such as the type of property, size of rooms, size of rooms, and other distinguishing qualities.
Traits must be stated such as property tax, scenic views, quality of schools, crime rate, and so on.
Environmental traits that have a correlation with property prices should be stated including the potentiality of water and air.
The hedonic regression function explains the relationship between two variables known as the dependent variable and the independent or explanatory variables representing the price of the asset and the traits of the asset respectively.
pi = j (ti)
Where: p is the price of a variety
i of a good
ci is a vector of traits related to the variety of the good
The hedonic regression function applicable format can be stated as a model in this form as;
p = (loc, str, acc, env, nei)
Where: p is the price of a property
The independent variables are the traits that control the price of a property
loc is the location characteristics, such as urban, rural, and distance from the city center.
str is the structure of the property, such as the number and size of rooms, and property range.
acc is the accessibility of the property, such as proximity to social amenities.