Determinants of House Price: A Decision Tree Approach

TLDR

Hedonic regression has been widely used to study house‑price determinants, but it faces criticism over assumptions, variable selection, functional form, and market segmentation. This study proposes using a decision‑tree approach as an alternative method for analyzing house‑price determinants. Applying the decision tree to Singapore’s resale public‑housing market, the authors examine price relationships, identify key determinants, and predict prices. The tree reveals that buyers of two‑ to four‑room flats prioritize floor area, model type, and age; five‑room buyers also consider floor level; executive‑apartment buyers emphasize quality and service features such as recreational facilities and living environment over quantitative characteristics.

Abstract

The hedonic-based regression approach has been utilised extensively to investigate th relationship between house prices and housing characteristics. However, this approach is subject t criticisms arising from potential problems relating to fundamental model assumptions an estimation such as the identification of supply and demand, market disequilibrium, the selectio of independent variables, the choice of functional form of hedonic equation and marke segmentation. This study introduces and utilises an alternative approach-the decision tre approach, which is an important statistical pattern recognition tool. Using the Singapore resal public housing market as a case study, the article demonstrates the usefulness of this techniqu in examining the relationship between house prices and housing characteristics, identifying th significant determinants of housing prices and predicting housing prices. The built tree show that homebuyers are more concerned about the basic housing characteristics of two- and three room flats or four-room flats such as floor area, model type and flat age. However, homebuyer of five-room flats pay more attention to floor level in addition to the basic housin characteristics. In addition, homebuyers of executive apartments are less concerned about basi quantitative characteristics and have higher housing consumption expectations and pay mor attention to 'quality' and service characteristics such as recreational facilities and the livin environment.