Housing rental submarkets in hedonic regression: econometric arguments and practical application

The paper deals with a hedonic model of housing rents focusing on geographical submarkets in the Belgian region of Wallonia. The question is what is the best way to use the delineated submarkets under the condition of a relatively small simple size. While the set of submodels for the submarkets provides an important improvement in the predictive capacity and a considerable reduction in the standard error as well as in the spatial autocorrelation in residuals, this approach has an important drawback unacceptable for the users of the Automated Valuation System “rent calculator”: in the submodels, some crucial structural variables, such as those for living area or building age, are often insignificant. This problem, caused, at least partly, by limited size of subsamples, manifests itself much less in the overall models (OLS and spatial error) with “location-quality values”. The practical advantages of these models are more important than the relative econometric superiority of the geographically weighted and multi-level alternatives.