Valuing Locational Externalities: A GIS and Multilevel Modelling Approach

Hedonic house price modelling has been used extensively in the valuation of locational externalities. However, the theory of how locational externalities impact upon house prices is not reflected in the traditional measurements of location used in these studies. The result is that many hedonic house price models suffer from parameter estimates that are either insignificant or counterintuitive. In this paper I attempt to move towards a more realistic valuation of locational externalities by examining the effects of location upon house prices from a geographical as opposed to a purely economic perspective. A multilevel conceptualisation is presented, which takes into account the spatial effects of locational externalities upon house prices. A location-sensitive GIS of Cardiff and a multilevel specification of the hedonic model is then used to model these effects. I conclude that a more realistic treatment of location is required if locational externalities are to be valued successfully.

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