MAY 16, 2017

DETERMINANTS OF HOUSE PRICING

FATIMA SADIK
HANIA AFZAL
MAHA ASAD
Institute of Business Administration, Karachi

Table of Contents
List of Tables .......................................................................................................................................... 2
Introduction ............................................................................................................................................. 3
Data ......................................................................................................................................................... 3
Variables ................................................................................................................................................. 3
Methodology ........................................................................................................................................... 3
OLS Regression with Winsorized Variables .......................................................................................... 4
Heteroscedasticity ................................................................................................................................... 4
Whites Test ........................................................................................................................................ 4
Bruesch Pagan Godfrey Test............................................................................................................... 4
Log Transformation of the Variables .................................................................................................. 4
Specification Bias and Error ................................................................................................................... 5
Multicollinearity ..................................................................................................................................... 5
VIF Test .............................................................................................................................................. 5
Conclusion .............................................................................................................................................. 5

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Institute of Business Administration, Karachi

List of Tables
Table 1: Variables, Expected Signs and Unit of Measurement .............................................................. 3
Table 2: OLS of winsorized variables..................................................................................................... 4
Table 3: OLS of log transformed variables ............................................................................................. 5

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Institute of Business Administration, Karachi

Introduction
To examine the relationship between house prices and housing characteristics (Area and
number of rooms) we have used OLS regression. Furthermore, we have investigated presence
of heteroskedasticity, specification error, and multicollinearity.

Data
We have collected prices and characteristics of 96 houses in Karachi from the website,
zameen.com. Our data incorporates observations of residential houses, excluding flats, plots
and apartments.

Variables
House price is the dependent variable, while Area and Number of Bedrooms are the dependent
variables.
Variable Unit of Measurement Expected Sign
House Price PKR
Area Square Yards +
Number of Rooms +
Table 1: Variables, Expected Signs and Unit of Measurement

House area and number of rooms have a positive relation with the house prices i.e. the price of
a house increases with increase in its number of rooms and its area.

Methodology
We checked our data for outliers by observing the box plot of each variable. To control the
effect of the potential outliers we winsorized the variables and then used them for our analysis.
After dealing with outliers, OLS regression was run by taking house prices as the dependent
variable and house area and number of rooms as the independent variables. Statistical
insignificance of an independent variable and high coefficient of determination indicated
heteroskedasticity. Moreover, since the nature of the data is cross sectional, heteroskedasticity
was an expected problem
To detect the problem, we used the White Heteroscedasticity Test. To resolve this issue, we
did the log transformation of house prices and house area. When regression was run with the
transformed variables then the results obtained were satisfactory.
Moreover, we also checked our data for specification error and bias. It was checked by applying
the Ramsey Reset test. We also checked for Multicollinearity by using the VIF test and by
looking at the correlation between the variables.

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Institute of Business Administration, Karachi

OLS Regression with Winsorized Variables

The regression was run after we had winsorized the variables. We took house prices as the
dependent variable and the house area and number of rooms as the independent variables. The
results were unexpected as the p- value turned out to be statistically insignificant (p>0.05) for
number of rooms and highly significant for the house area (Square Yards) per the t- values.
The for the model turned out to be 0.6826. Table 2 shows the results.
(1)
VARIABLES PriceRs(Win)

SqYd(Win) 162,568***
(13,926)
NoRooms(Win) 1.854e+06
(2.889e+06)
Constant -1.815e+07
(1.285e+07)

Observations 96
R-squared 0.683
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 2: OLS of (win)- winsorized variables

Heteroscedasticity
Whites Test
Whites is used to test presence of heteroskedasticity. The p- value was less than 0.05 so we
rejected the null hypothesis (homoscedasticity) and concluded the presence of
heteroskedasticity in the model.
Bruesch Pagan Godfrey Test
We also conducted the Bruesch pagan test for the presence of heteroscedasticity and the results
were positive with the p value less than 0.05 indicating the rejection of the null hypothesis and
concluding that heteroskedasticity exists in the model.

Log Transformation of the Variables

To resolve the problem of heteroscedasticity transformed house prices and house area into
logarithmic values. After that the regression was run and the results were obtained. Now the
coefficients turned out to be statistically significant and the signs of the coefficients also turned
out to be positive (as supported by the theory). Moreover, the value of R squared of the model
is 0.59 which is good. Table 3 shows the results.

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Institute of Business Administration, Karachi

VARIABLES LogPriceRs(Win)

LogSqYd(Win) 0.826***
(0.110)
NoRooms(Win) 0.156***
(0.0501)
Constant 12.00***
(0.564)

Observations 96
R-squared 0.593
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 3: OLS of log transformed variables

Specification Bias and Error

The Ramsey Regression Equation Specification Error Test was run to check whether non-linear
combinations of the fitted values help explain the dependent variable. The p-value turned out to
be 0.4883 which is greater than 0.05 which means that the null hypothesis cannot be rejected
and so this shows that the linear combination of fitted values didnt explain the house prices.

Multicollinearity
VIF Test
The variance inflation factor is 1.47 for our model which shows that the variance of the
estimated coefficient of the number of rooms and the house area is inflated by a factor of 1.47
because the independent variables are not correlated with each other in the model. Also, the
VIF of the model was less than 10 showing that there was no multicollinearity present in our
model.

Conclusion
We explored the relationship between house prices and house characteristics, namely area and
number of rooms. Area and number of rooms have positive relationship with house prices.
Since our data is cross sectional we expected presence of heteroskedasticity. We confirmed the
presence of heteroskedasticity using Whites Heteroskedasticity test, and we corrected it by log
transforming house prices and area.