Automated Valuation Model Accuracy: Some Empirical Testing

In recent years there has been a rapid move towards the adoption of Automated Valuation Models (AVMs) for basic residential valuations for mortgage security purposes. In Australia several commercial organisations now offer such residential valuations, but very little is known about the accuracy of these. While the accuracy of commercial models is almost impossible to measure, one problem is that few people understand the practical implications of the accuracy measures. Put simply most users of these products misunderstand the level of accuracy involved. This paper uses a data base of sales in Adelaide, South Australia to measure the accuracy of basic automated valuation models under a range of different model scenarios. Some very simple “models” based on the application of elementary descriptive statistics provide remarkably accurate estimates based on some evaluation criteria. Other models using more sophisticated hedonic price models produce better results but the small increase in accuracy may not justify the cost to develop and maintain these models. It is hoped that this paper will lead to a better understanding by users of these products of the accuracy of Automated Valuation Models.