Contingent Valuation Method and Market Value: Applying Stated preference methods in Real Estate Market

One of the most criticism in Real Estate appraisal processes based on sales comparison approach is the reliability of data about market prices of comparable properties. The lack of information on house prices is particularly relevant in Italy, where households’ preference for housing wealth is very high, due also to the market orientation of Italian households for owner-occupation (Di Addario 2002; Faiella et al. 2008). In this context, the use of evaluation methods based on hypothetical markets, most widely used in the field of the evaluation of environmental goods or cultural heritage, could solve that problem. It has been found (Mattia et al. 2003) that estimating the willing to pay (WTP) for a sample of goods with different features brings to reliable outcomes with negligible gaps by comparison with the values obtained by the more traditional real estate appraisal methods. According to these general assumptions, the paper suggests the use of stated preference methods with the aim of replace in the appraisal models the market prices (historical data) of a sample of properties with the willing to pay for the same goods. More in deep, of the various valuation stated preference (SP) techniques available, Contingent Valuation Method (Dichotomous Choice Model) has been used in order to estimate the market value of a sample of residential properties in the city of Milano. Even if the two main features of this method – the hypothetical character of the questions and the fact that actual behaviour is not observed but only predicted – has been broadly criticized (Adamowicz et al. 1994), in this study the WTP can be considered the behaviour of potential buyers selected by a real estate agency and advertisements on real estate reviews in the face of real choices. Strategic bias has been reduced by pre-testing the valuation questionnaire and using different bidding mechanism according to two different groups of buyers selected, the one who answer that the property meets its needs and the second who is not really interested in it. To this end, it’s meaningful to specify that the possible strategic character of the answers to the questionnaires given by individual interview is consistent with the real estate prices’ formation process. Starting from the critical analysis of the outcomes of this first case study, the paper suggests an evaluation procedure for the systematic production of economics data – median WTP – to use in statistical pluriparametric appraisal models in order to build up a databank of normal willing to pay for properties according to the principle of transparency.