26

Spatial Hedonic Models

Luc Anselin and Nancy Lozano-Gracia

Abstract
In this chapter, we focus on some econometric aspects related to a sub-set of hedonic house
price models, which we refer to as spatial hedonic models. In these, the locational aspects of
the observations are treated explicitly, and the estimation of the models is an application of spa-
tial econometrics. As defined in Anselin (2006), spatial econometrics “consists of a sub-set of
econometric methods that is concerned with spatial aspects present in cross-sectional and space-
time observations.” These methods focus in particular on two forms of so-called spatial effects in
econometric models, referred to as spatial dependence and spatial heterogeneity. In this chapter
we provide a review of the principles underlying the hedonic house price model, and continue
to extensively discuss spatial econometric aspects due to spatial models and spatial data specific
to house price applications. We review and discuss the treatment of spatial dependence (includ-
ing space-time dynamics) and spatial heterogeneity with selective illustrations from the empirical
literature.

26.1 Introduction 1214
26.2 Hedonic house price models 1216
26.2.1 General framework 1216
26.2.2 Estimation 1217
26.3 Spatial models 1218
26.3.1 Spatial dependence 1220
26.3.1.1 Spatial lag model 1220
26.3.1.2 Spatial error model 1221
26.3.1.3 Other models of spatial dependence 1224
26.3.1.4 Models for space-time dependence 1225
26.3.2 Spatial heterogeneity 1227
26.3.2.1 Discrete spatial heterogeneity 1227
26.3.2.2 Continuous spatial heterogeneity 1228
26.4 Methodological challenges 1230
26.4.1 Spatial scale 1230
26.4.1.1 Spatial observations 1231
26.4.1.2 Spatial sampling 1231
26.4.2 Endogeneity 1232
26.5 Empirical evidence: spatial dependence 1233

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