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Main Variables Influencing Residential Property Values Using the Entropy Method – the Case of Auckland
1Dr. Ge, Xin Janet and 2Du, Yue
1School of the Built Environment, UTS, Sydney
2Beijing Widnell Engineering Consultancy Co. Ltd
Property value is an essential aspect of property markets world wide. They are determined by a variety of factors and determining those factors is a significant part of valuing properties. The Entropy method is one of the ranking approaches used for property valuation. The benefits of the entropy method include that it requires less information than do other methods.
This paper investigates the main variables that influence residential property values in the Auckland, New Zealand property market and ranks the variables using the Entropy method. The paper starts by reviewing the literature and identifies the possible determinants for residential property value. Secondly, a total of 6791 data sets were collected from the Auckland property market and reasonable assumption made to quantify the data. The application of entropy based on weight of importance, and the priority ranking is than obtained. It is found that number of Bedrooms, CPI, land area, and location are the most significant variables contributing to property values. Keywords: Property value, Valuation, Entropy, Auckland
Real estate property valuation is a topic of interest for stakeholders for different purpose. Governments value properties for tax purposes. Investors like to know the purchase price of the property in which they are going to invest. Developers seek to find out the Ge & Du/July2007/Macao
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feasibility of selling price for their decision-making. Other purposes are for bank lending, accounting reports and insurance. There are different concepts of market value and price. Market value is defined by FNMA (2007) as:
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
The definition of the International Valuation Standards Committee (IVSC) (2007) has been adopted by many national property organizations as follows: “Market value is the estimated amount for which an asset should exchange on the date of appraisal between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
Both definitions focus on property transactions in a fair market. “Price” can be the same, under or above the market value depending on specific market conditions as a result of the interaction of the forces of supply and demand. Real estate property valuation is thus the study of market value of properties.
There are risks or uncertainty in property valuation as it could be subjective (Joslin, 2005). To be able to accurately estimate a property value, we must study the main attributes and it is also important how the attributes impact on the value. This paper investigates the main attributes that influence residential property values applying the Entropy method, using data from the Auckland property market. The paper starts by identifying the possible determinants for residential property value and methods used for the study by reviewing the literature. Secondly, the method and basic steps to apply Entropy will be described. Thirdly, a total of 6791 data sets were Ge & Du/July2007/Macao
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collected and applied to the Entropy method, followed by a discussion of results and conclusions.
REVIEW OF RELATED WORK
Previous research has found that the value of residential properties depend a number of characteristics because...