Hedonic estimation: using comparable values for property valuation
Hedonic property valuation plays a key role in providing an objective and market-driven assessment of a property's value. This method, introduced more than 25 years ago by IAZI in the Swiss real estate market, relies on an extensive data analysis of comparable properties. Discover how the hedonic valuation works and what advantages it offers.
What is a hedonic estimation?
Hedonic estimation is a statistical method used to evaluate a property based on comparable sales transactions. The determined value reflects the price that similar properties in comparable locations have recently achieved on the market. The uniqueness of this method lies in the objective determination of price influences by the market itself, ensuring a high level of market proximity and objectivity.
The accuracy of the estimation depends heavily on the availability and quality of comparable data. In markets with a low number of transactions or for unique properties, this method quickly reaches its limits.
When is the hedonic estimation used?
Hedonic estimation is used when a fast, objective, and market-based property valuation is required. This applies in various situations, such as:
- Sales preparation to determine a realistic selling price.
- Financing requests, where banks and insurance companies need to assess the value for mortgage approvals.
- Investment decisions to analyze the value and potential of a property.
Hedonic estimation is suitable for a wide range of property types, including:
- Single-family homes and condominiums, where accuracy is particularly high.
- Multi-family buildings.
- Commercial properties, though valuation complexity may increase.
However, it is important to note that hedonic estimation works particularly well for standard properties. For real estate with unique features or in exceptional locations, obtaining a detailed valuation from a professional may be advisable.
Which factors are considered in the hedonic valuation?
The valuation of a property is based on around 70 different factors, divided into quantitative and qualitative aspects as well as macro and micro location:
- Quantitative factors include measurable characteristics such as living space, number of rooms, and plot size.
- Qualitative factors refer to the condition and quality of the property’s features.
- Macro location considers regional and national location factors.
- Micro location assesses the immediate surroundings of the property in terms of infrastructure and living quality.
Hedonic valuation compared to the traditional property valuation method
In addition to hedonic valuation, there is also a ‘traditional’ valuation method: the real value approach.
The real value method is based on the new construction cost of an equivalent building. Depreciation due to age is deducted, and the land value is added. The focus is on reliably assessing the building's substance, as this is a key factor in price calculation.
While hedonic valuation is particularly effective when a large number of comparable property transactions are available, the real value method is better suited for special properties (e.g., luxury real estate, unique properties) where little to no comparable market data exists.
Frequently asked questions about hedonic valuation
How accurate are hedonic valuations compared to market prices?
The accuracy of hedonic valuations in comparison to actual market prices depends on the quality and quantity of available data, market stability, and the uniqueness of the property being assessed. However, for the Swiss market, hedonic valuations are generally considered highly accurate.
Can hedonic valuation be applied to all types of properties?
Hedonic valuation can assess almost all types of properties. However, it is less suitable for unique properties with few comparable data points, such as very remote houses, luxury real estate, or one-of-a-kind properties.
