Spatial heterogeneity and spatial bias analyses in hedonic price models: Some practical considerations

Abstract

A great number of contemporary studies are incorporating explicit consideration of spatial effects in the estimation of hedonic price functions. At the most basic level, interactive spatial regime models are employed to detect the presence of spatial heterogeneity in datasets. A full-scale spatial analysis would include determination and adjustments for spatial lag and spatial error dependences. However, there is still plenty of room for future research to help unravel the numerous modelling and practical issues associated with a comprehensive spatial examination, such as the specification of the spatial dependence structure or functional 'neighbourhoods'. Another important issue relates to the use of spatial multipliers to filter spatial bias particularly in models which use log-transformed variables. Estimation of a hedonic price function using Malaysian dataset of agricultural land sale values indicates spatial disaggregation and spatial dependence. However, diagnostic tests and actual estimation of spatial models do not always provide unambiguous conclusions while predicted errors do not vary all that much from those generated by simpler models. Despite the conceptual appeal of spatial analyses, the inefficiency attributable to spatial biases may not be large enough to cause critical errors in policy decisions.