They include (but may not be limited to) information availability and knowledge, validation of measurements, market limitations, multicollinearity, and price fluctuations.Ĭoncerning Information and knowledge, hedonic models assume and necessitate the need for all concerned individuals to have information regarding all positive and negative property features that may impact the purchase of a property. There are five notable drawbacks of using hedonic pricing methods. The model is common in the housing sector because of its flexibility and ability to accommodate various factors and parameters in the determination of a fair property price. Overall, the hedonic pricing method allows for a fair value determination of a property because it accounts for various external factors that can potentially influence the price of the asset, and it allows for a simplified justification for price variations due. The model is adaptable and can be structured in a way that accounts for numerous probable connections between an asset or property and environmental quality, among other external factors. The general assumption that property markets change and respond to new or existing information supports the efficiency and reliability of value indication through the model. The hedonic pricing method can be applied to determine values and derive conclusions based on definite choices. The willingness to pay is derived from the size of the property, the income of a household, and preferences based on individual characteristics, which include age, family size, race, and social background, etc. The second part of hedonic regression is the analysis of the households’ willingness to pay, with consideration of their income and preferences.The hedonic price of an asset can be called the asset’s additional cost, based on the additional benefit derived from the property’s features. The price variation, which occurs due to changes in any of the property or asset’s characteristics, is called the hedonic price.

The initial step is determining the relationship between an asset’s value or price (which would be the dependent variable in the analysis) and the independent explanatory variables (which are the characteristics, including the property’s features, the location features, and the environmental features).

There are two parts to performing hedonic regression analysis.

The hedonic pricing model is common in the housing sector because of its flexibility and ability to accommodate various factors and parameters in the determination of a fair property price.The method is commonly applied in the valuation of properties, such as houses, and accounts for economic costs or benefits, which may influence the overall value of the asset or, as commonly presumed, a house.Hedonic pricing – or the hedonic pricing method – is used in the determination of the economic value for an ecosystem service or services that may influence the market price of a good or asset.

Hedonic value definition