Explainable AI in a Real Estate Context – Exploring the Determinants of Residential Real Estate Values

Bastian Krämer, Cathrine Nagl, Moritz Stang and Wolfgang Schäfers

Journal of Housing Research, 2023, vol. 32, issue 2, 204-245

Abstract: A sound understanding of real estate markets is of economic importance and not simple, as properties are a heterogenous asset and no two are alike. Traditionally, parametric or semi-parametric and, thus, assumption-based hedonic pricing models are used to analyze real estate market fundamentals. These models are characterized by the fact that they require a-priori assumptions regarding their functional form. Usually, the true functional form is unknown and characterized by non-linearities and joint effects, which are hard to fully capture. Therefore, their results should be interpreted with caution. Applying the state-of-the art non-parametric machine learning XGBoost algorithm, in combination with the model-agnostic Accumulated Local Effects Plots, (ALE) enables us to overcome this problem. Using a dataset of 81,166 residential properties for the seven largest German cities, we show how ALE plots enable us to analyze the value-determining effects of several structural, locational and socio-economic hedonic features. Our findings lead to a deeper representation of real estate market fundamentals.

Date: 2023
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DOI: 10.1080/10527001.2023.2170769

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