Machine learning with explainability or spatial hedonics tools? An analysis of the asking prices in the housing market in Alicante, Spain

Abstract

Two sets of modelling tools are used to evaluate the precision of housing-price forecasts: machine learning and hedonic regression. Evidences on the prediction capacity of a range of methods points to the superiority of the random forest as it can calculate real-estate values with an error of less than 2%. This method also ranks the attributes that are most relevant to determining housing prices. Hedonic regression models are less precise but more robust as they can identify the housing attributes that most affect the level of housing prices. This empirical exercise adds new knowledge to the literature as it investigates the capacity of the random forest to identify the three dimensions of non-linearity which, from an economic theoretical point of view, would identify the reactions of different market agents. The intention of the robustness test is to check for these non-linear relationships using hedonic regression. The quantile tools also highlight non-linearities, depending on the price levels. The results show that a combination of techniques would add information on the unobservable (non-linear) relationships between housing prices and housing attributes on the real-estate market.