Learning outcome: LO5: Conclude which property to purchase using hedonic modelling

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MODULE 4 UNIT 2
Activity submission

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Learning outcome:
LO5: Conclude which property to purchase using hedonic modelling to assist in the
decision-making process.
Name:
1. Instructions and guidelines (Read carefully)
Instructions
1. Insert your name and surname in the space provided above, as well as in the file
name. Save the file as: First name Surname M4 U2 Activity Submission – e.g.
Lilly Smith M4 U2 Activity Submission. NB: Please ensure that you use the name
that appears in your student profile on the Online Campus.
2. Write all your answers in this document. There is an instruction that says, “Start
writing here” under each question. Please type your answer there.
3. Submit your assignment in Microsoft Word only. No other file types will be
accepted.
4. Do not delete the plagiarism declaration or the assignment instructions and
guidelines. They must remain in your assignment when you submit.
PLEASE NOTE: Plagiarism cases will be investigated in line with the Terms and
Conditions for Students.
IMPORTANT NOTICE: Please ensure that you have checked your course calendar for
the due date for this assignment.
Guidelines
1. There are 4 pages and 1 question in this assignment.
2. Make sure that you have carefully read and fully understood the questions before
answering them. Answer the questions fully but concisely and as directly as
possible. Follow all specific instructions for individual questions (e.g. “list”, “in point
form”).
3. Answer all questions in your own words. Do not copy any text from the notes,
readings, or other sources. The assignment must be your own work only.
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Plagiarism declaration:
1. I know that plagiarism is wrong. Plagiarism is to use another’s work and
pretend that it is one’s own.
2. This assignment is my own work.
3. I have not allowed, and will not allow, anyone to copy my work with the
intention of passing it off as his or her own work.
4. I acknowledge that copying someone else’s assignment (or part of it) is
wrong, and declare that my assignments are my own work.
2. Mark allocation
The question is worth 12 marks. However, you will only receive a final percentage mark
and will not be given individual marks for the sections of the question. The mark
allocation is there to show you the weighting and length of the question.
3. Question
You are an investor looking to purchase a house that provides the best value for money.
You examined some recent rigorous hedonic studies and formulated the following
equation for the fair market value of a house:
P = aX + bA
Where:
P = The fair market value of the house in pounds
X = The floor area of the house in square metres
A = A dummy variable equal to 1 if the house has a distinctive view and 0 if it does not
a = 2,500
b = 16,000
You have identified two similar properties in similar locations. Table 1 summarises the
characteristics (attributes) of these houses.
Table 1: House characteristics.
Floor space (m2) Distinctive view Asking price (£)
House A 120 No 299,000
House B 115 Yes 301,000
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1.1 Based only on the information about the floor space and price provided in Table 1
(assuming that you don’t know about the view), which house initially seems as though it
offers the better deal per square metre? Support your answer with calculations and limit
your answer (excluding calculations) to 30 words. Round your calculations to the nearest
pound.
Start writing here:
Price Per Square Feet of House A: £299,000/120m^2
Price Per Square Feet of House A: £2491.67.
And
Price Per Square Feet of House B: £301,000/115m^2
Price Per Square Feet of House B: £2617.39.
It is important to note that the price per square feet of House A is comparatively less and
would be well considered for investment or purchase purpose when compared in cost
terms that is price per square feet.
1.2 Calculate the hedonic prices of House A and House B, taking into account both the
square metreage and the presence or lack of a distinctive view.
Start writing here:
Hedonic Price of House A: P = aX + bA
Where:
P = The fair market value of the house in pounds
X = The floor area of the house in square metres
A = A dummy variable equal to 1 if the house has a distinctive view and 0 if it does not
a = 2,500
b = 16,000
P: 2,500*(120)+16,000*(0)
P: 2,500*120+0
P: £300,000.
Hedonic Price of House B: P = aX + bA
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Where:
P = The fair market value of the house in pounds
X = The floor area of the house in square metres
A = A dummy variable equal to 1 if the house has a distinctive view and 0 if it does not
a = 2,500
b = 16,000
P: 2,500*(115)+16,000*(1)
P: 2,500*115+16,000
P: £303,500.
1.3 Using your answers from 1.2, which house would you purchase, given your
investment goals (which is to maximise value)? Support your answer with calculations
and limit your answer (excluding calculations) to 50 words.
Start writing here:
Based on the values calculated that is from 1.2 its is well recommended that we should
well go for purchasing House B as the same is having a greater value creation
opportunity. As the actual price of House A according to Hedonic Price should be around
£300,000 but the same is around £ 299,000 giving the investor only £1,000 extra,
However, in the case of House B, the price of House B according to Hedonic Price
should be around £303,500 but the same is around £ 301,000 giving the investor only
£2,500 extra amount of benefit.
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