Spatial homogeneity is a strong assumption in the hedonic housing price context; if not analyzed conveniently it can be a potential source of specification errors. Spatial heterogeneity occurs when a territorial segmentation exists in the housing market and, therefore, either the hedonic prices associated with different attributes or the characteristics of the houses are not constant over space. The evidence of recognition of housing sub-markets and the argument that caution should be exercised when interpreting the results of standard hedonic models has been identified early in the literature. Despite the argument that housing sub-markets should be adopted as a working framework, some ambiguity remains about how to deal with this issue. The early empirical works on sub-markets tended to be segmented into two major perspectives: those studies that adopt a supply side determinant focusing on the structural characteristics of dwellings and on neighbourhood characteristics; and those that focus on demand side determinants, such as, on household incomes or other demographic and socioeconomic characteristics. In this case the existence of distinct subgroups of demand is reflected on the territorial segmentation of the hedonic price vector. Thus, the objective of this communication is to present several approaches to define housing sub-markets. The analysis is applied to the urban area of Aveiro-Ílhavo in Portugal where demand and supply side views of defining housing sub-markets will be compared.
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