Hedonic estimation: this is how it works

Thanks to the hedonic valuation model, anyone wishing to determine the value of their property can obtain an assessment, including a price indication, quickly, objectively and often free of charge. By providing key information about a property, you can find out online what price range is appropriate and work out the market value. UBS’s price checker also uses the hedonic method.

The valuation of a property is a great help when selling real estate. It is essential for taking out a mortgage, as you can never borrow more than the market value. The market value is also of vital importance for insurance and successions.

Hedonic estimation is based on a comparison of the property you want to buy or sell with current sales of owner-occupied residential properties on the Swiss market. These include single-family and two-family houses, vacation homes as well as apartments in condominium ownership and vacation apartments. The model was developed in 1999 by the real estate service provider Wüest Partner in association with UBS. The data is currently based on more than 20,000 arm’s length transactions per year, estimated to represent half of all real estate sales in Switzerland.

Nowadays, the hedonic approach is used not only to value real estate, but also to calculate inflation and economic growth in many countries. An item is always mentally broken down into its various quality traits, and the model assumes that each trait has a benefit that can be expressed as a price. In the case of a property, the quality traits are the net living area, the building volume, the year of construction, the condition of the building, the standard of finish and the location in the municipality or neighborhood, including the attractiveness of the relevant area. The attractiveness of the location is in turn determined according to criteria such as school and shopping facilities, noise pollution and accessibility by public transport, etc.

Hedonic estimation is a comparative value method. The historical values of actual sales prices in Switzerland are used to draw up a statistical-mathematical evaluation. Around 70 criteria are used to determine property value. Some of these are mentioned above.

Online calculators are available to give you an initial price indication. Whether or not this type of estimate is realistic depends on the tool used and the data recorded, as well as on how objectively the owner values the property.

To obtain the most reliable estimate of the market value of a property, it is best to consult an independent expert, for example from the Swiss Association of Real Estate Appraisers (SIV), the Homeowner Association (HEV) or the Swiss Real Estate Association (SVIT). UBS client advisors can also offer assistance.

Hedonic estimation is a comparative value method. There are two other classic methods for determining the value of a property.

The real value/asset value method

The real value method, also known as the asset value method, determines how much money would have to be spent to rebuild the same property, less age depreciation and other factors that could reduce its value. After all, a 40-year-old building is not a new building. The real value method always focuses on the building structure and can only be carried out by an expert.

Capitalized income value method

The capitalized income value method takes rents and leases as the basis for valuation. It is particularly appropriate for properties that are used commercially or for rented residential properties. The higher the returns, the higher the property value. This approach is not suitable for owner-occupied residential property.

Hedonic estimation is the ideal method for standard properties such as owner-occupied apartments and traditional single-family homes. It represents a market-based valuation; it is fast and cost-effective. For exceptional properties, however, you should consult an expert.