eThesis - School of Business electronic theses

This thesis presents the theory of the hedonic price method and earlier empirical results received with the method with respect to contribution of apartment and surroundings characteristics to the total apartment price. The aim of the thesis is to build a coherent picture of the hedonic price method and how the different apartment characteristics affect the apartment price. A brief empirical study is included to the thesis. Nevertheless, the research method is mainly a literature review and is based on both Finnish and foreign literature.

The hedonic price method is often used for apartment price analysis, where apartments are treated as differentiated products with a set of measurable characteristics. Each apartment characteristic contributes to the observable total apartment price. With the hedonic price method, the price contribution of each characteristic can be specified and we can further analyze how the entire set of the characteristics’ values guide the consumer and producer decisions in the apartment market. However, this thesis concentrates on the apartment characteristics contribution to apartment price, so the previous empirical results of consumer and producer decisions are not discussed.

The data for this thesis was collected from an internet database Asuntojen.hintatiedot.fi. The data consists of the actual transaction prices in the Helsinki apartment market from a period of one year during years 2007 and 2008. The sample size is 2392 transactions and includes a total of eight different apartment characteristics as well as a location variable for each transaction.

The results of the literature review suggest that the hedonic price method seems to suit well for apartment price analysis, since apartments are heterogeneous products with many characteristics. The review of previous empirical results suggests that most of the apartment characteristics have a positive effect on the apartment price. There are still some differences between some results. These differences are originated from regional factors or differences in methodological approaches, such as choice for the price function form. The results show that the hedonic price method also seems to lack a uniform practice in the empirical use, and therefore the results and approaches of different studies are not often directly comparable with each other. The results received with the hedonic price method do not also seem to take account the dynamics affecting the apartment markets.

The empirical section of the thesis analyzes the effect of different hedonic price function forms to variable coefficients and price effects of distance to Helsinki city center, building age and the existence of an elevator. These results are compared with previous Finnish hedonic price studies. None of the empirical results appear exactly similar with the results of the previous studies and the possible reasons for these differences are discussed in this thesis.