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Do peer effects shape property values?

François Des Rosiers (Urban & Real Estate Management, Faculty of Business Administration, Laval University, Quebec City, Canada)
Jean Dubé (Département sociétés, territoires et développement, Université du Québec à Rimouski (UQAR), Rimouski, Canada)
Marius Thériault (Graduate School of Land Planning and Regional Development, Laval University, Quebec City, Canada)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 12 July 2011

Abstract

Purpose

Both hedonics and the traditional sales comparison approach are derived from a similar paradigm with respect to how prices, hence market values, are determined. While the hedonic approach can provide reliable estimates of individual attributes' marginal contribution, it may – unlike the sales comparison approach – underestimate the prominent influence that surrounding properties exert on any given nearby housing unit and sale price. This paper seeks to develop a simple method for reconciling the two approaches within a rigorous conceptual and methodological framework.

Design/methodology/approach

Peer effect models, an analytical device developed, and mainly used, by labour economists, are adapted to the hedonic price equation so as to incorporate nearby properties' influences, thereby controlling for non‐observable neighbourhood effects. In addition to basic, intrinsic, building and land attributes, the ensuing model accounts for three types of effects, namely endogenous interactions effects (i.e. comparable sales influences, or peer effects), exogenous, or neighbourhood, effects and, finally, spatial autocorrelation effects.

Findings

Preliminary findings suggest that integrating peer effects in the hedonic equation allows bringing out the combined impacts of endogenous, exogenous and spatially correlated effects in the house price determination process, with spatial autocorrelation of model residuals being significantly reduced, even without resorting to a spatial autoregressive procedure.

Research limitations/implications

Further investigation is still needed in order to find out which submarket delineation should be used to obtain optimal model performances.

Originality/value

The paper leads to the conclusion that the comparable sales approach, as used in traditional appraisal practice, is valid, although its application is typically flawed by the too small sample size generally used by appraisers. Further investigation is still needed, however, in order to find out which submarket delineation should be used to obtain optimal model performances. This raises the paramount question as to whether the peer effect variable is adequately measured and addresses the tricky issue of kernel determination in spatial statistics and related applications, such as GWR.

Keywords

Citation

Des Rosiers, F., Dubé, J. and Thériault, M. (2011), "Do peer effects shape property values?", Journal of Property Investment & Finance, Vol. 29 No. 4/5, pp. 510-528. https://doi.org/10.1108/14635781111150376

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited