- Improved Methods for Predicting Property Prices in Hazard Prone Dynamic Markets
- Environmental and Resource Economics volume 69, pages247–263 (2018)
- Koende Koning, Tatiana Filatova, and Okmyung Bin
Property prices are affected by changing market conditions, incomes and preferences of people. Price trends in natural hazard zones may shift significantly and abruptly after a disaster signalling structural systemic changes in property markets.
The purpose of this study is to suggest a model that can be widely applicable and quickly calibrated in a changing environment. We systematically study four statistical models: starting from a typical standard hedonic function and gradually changing its functional specification by reducing the hedonic analysis to some basic property characteristics and applying kriging to control for neighbourhood effects.
Across different sample sizes we find that the latter performs consistently better in the out-of-sample predictions than other traditional price prediction methods. We present the specific improvements to the traditional spatial hedonic model that enhance the model’s prediction accuracy.
The improved model can be used to monitor price changes in risk-prone areas, accounting for changes in flood risk and at the same time controlling for autonomous market responses to flood risk.