Hedonic estimation: See how we rate the market value of properties

3.12.2020
  1. See how the hedonic estimation works
  2. Banks rely on the hedonic estimation
  3. The basics for hedonic estimation
  4. Object-specific criteria
  5. Location-specific criteria
  6. The most important advantages at a glance
  7. The price is a matter of negotiation
  8. The hedonic estimation of Houzy

Real estates can be valued by a real estate agent or appraiser or by a computer-based analytical model (see "Property valuation: How much is your house or flat worth?"). The hedonic estimation is a statistical comparative value model that was developed in the USA in the mid-20th century to explain the price differences of goods with different characteristics, for example cars or building plots. In the 1980s, the method was used for the first time to value real estate. Today, hedonic valuation is widely used for houses or flats. Our free property valuation also relies on hedonic valuation.


See how the hedonic estimation works

The hedonic estimation provides a computer-assisted market value estimation. The statistical comparative value method takes into account all transaction prices of comparable houses or flats in the region. The computer model divides a property into so-called quality characteristics so that it can be compared with other properties and uses a multiple regression analysis to calculate how strongly the quality characteristics influence the price of a property. Regression analysis is a statistical procedure with which a dependent variable, for example the market value of a property, is explained by one or more independent variables, for example the location and property-specific criteria of the property. The result of this statistical comparative value procedure is a well-founded market value estimate that is real and objective for standard properties such as single-family homes, condominiums or apartment buildings.

The result of the hedonic estimation is a well-founded market value estimation that is real and objective for standard properties such as single-family houses, condominiums or apartment buildings.

Banks rely on the hedonic estimation

That is why almost all investment foundations, banks, pension funds and insurance companies work on the computer model when they finance residential property and need a market value estimation. Brokers or project developers also often rely on the hedonic estimation to value a property quickly, close to the market and at low cost.

In special cases, a valuation by a real estate agent or valuator can make perfect sense. For example, in the case of properties with large building land reserves, farms, lovers' properties such as Maiensässe or Rustici, luxury properties or very old houses - and in the case of inheritance divisions or in divorce cases. Hedonic estimation is also rather difficult for properties in building rights or with value-relevant obligations.

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The basics for hedonic estimation

The better the data, the more reliable the result. This also applies to hedonic estimation. That is why the statistical comparative value method is based on large databases. Depending on the model, plus/minus 20 property-specific criteria and plus/minus 50 location-specific criteria flow into the calculations. Object-specific criteria must be recorded, location-specific criteria are found by the system via the address of the object in databases and directories. The statistical comparative value method evaluates all plus/minus 70 property characteristics with their implicit prices in market equilibrium and estimates the market value of a property on this basis. Unlike the buyer or seller, it evaluates the criteria neutrally and objectively instead of subjectively and sometimes emotionally. Especially if the seller associates fond memories with the property.

Object-specific criteria

Depending on the model, you need to record various object-specific criteria for a hedonic estimation. All models need quantitative property information and qualitative property information about the house or flat for a sound market value estimation.

Quantitative object information

  • Plot area
  • Room volume
  • Living area
  • Rooms

Qualitative object information

  • Age
  • Expansion
  • Standard

Location-specific criteria

For all models, you must enter the address of the property so that the system can pull together the location-specific criteria from publicly accessible databases and directories. The location-specific criteria are divided into macro-location and micro-location.

Macro-location

  • Attractiveness of the community (jobs, education, leisure, schools)
  • Attractiveness of the region (jobs, education, leisure, schools)
  • Land prices in the community or neighbourhood
  • Tax rate of the community and the canton
  • Transport links (car and public transport)
  • Business centres in the proximity

Micro-location

  • View
  • Sun exposure
  • Distances to public transport
  • Shops in the proximity
  • Emissions (especially noise)
  • Kindergartens and schools nearby
  • Neighbourhood

The hedonic estimate takes into account object- and location-specific criteria
Object-specific and location-specific criteria are incorporated into the hedonic valuation.

The most important advantages at a glance

  1. The hedonic estimation is close to the market because all buyers and sellers of comparable properties in the same region define the market value estimation, not a single individual. The valuation reflects the market logic as realistically as possible.
  2. The hedonic estimation is fast. If you have all the data at hand, you can find out how much a property is worth in two minutes with the Houzy valuation, for example. In addition, you receive a new valuation every three months and can thus monitor the development of the value.
  3. The hedonic estimation works all over Switzerland. Even in areas where fewer houses or flats are bought and sold than in urban centres, for example.
  4. The hedonic estimation is very accurate and objective for standard properties such as single-family houses, condominiums or apartment buildings because it is influenced by facts.

The price is a matter of negotiation

The hedonic estimation is a solid basis for negotiations when you buy or sell residential property. However, the market value estimation is not the purchase price or the sales price. Ultimately, as in any negotiation, it is a matter of the contracting parties finding and agreeing on a price. Sometimes two hedonic estimations can differ from each other. On the one hand, because not all models weight the criteria equally, on the other hand, because different interests can be behind an estimation. Banks, for example, like to value a property more cautiously in order to protect themselves against losses in value.

Houzy Advice

Good to know

Banks lend on residential property according to the lowest value principle. This means that you receive up to 80 percent of the purchase price or market value as a mortgage - whichever is lower. If you buy a property above market value, you have to raise the difference yourself as additional equity.

Agree on a fair price with the hedonic estimation
The hedonic estimation is a solid basis for negotiation for both buyer and seller.

The hedonic estimation of Houzy

Our market value estimation is based on the statistical comparative value model of our partner Fahrländer Partner Raumentwicklung. FPRE, like Houzy, is neutral and independent and has collected hundreds of thousands of transaction records throughout Switzerland in recent years. Based on this data, we can estimate the market value with a high degree of accuracy. All data is continuously updated and market values are recalculated every three months. Once a quarter, we inform you by e-mail how the value of your house or flat has changed. FPRE's comparative value model learns from itself every quarter, ensuring high accuracy of its results, also in the future. The market value estimate is free of charge and does not commit you to anything.

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