RESIDENTIAL HOUSING DEMAND IN

NAIROBI; A HEDONIC PRICING APPROACH

Mongare G. Kemunto, Dr. Wilfred Nyangena
American Journal of Economics
ISSN 2520-0453(Online)
Vol.1, Issue 2 No.5, pp 64 -85, 2017
www.ajpojournals.org

RESIDENTIAL HOUSING DEMAND IN NAIROBI; A HEDONIC

PRICING APPROACH
1*
Mongare G. Kemunto
Undergraduate Student: School of Economics
University of Nairobi
*Corresponding Author’s E-mail: [email protected]

2
Dr. Wilfred Nyangena
Lecturer, School of Economics
Abstract
Purpose: The purpose of this study was to asses the residential housing demand in Nairobi
using a hedonic pricing approach.
Methodology: The study used an OLS regression model to link House rent to various
determinants. For the purpose of analysis the population o be sampled was based in Nairobi.
The researcher focused on the Nairobi up market residential areas and the Nairobi lower
market residential areas. The sampling frame consisted of residential housing facilities in
both the up market and lower market Nairobi area. The sample size was specifically fifty five
up market and lower market residents in Nairobi. Short and simple questionnaires were the
main data collection method used to obtain the primary data of the information.
Results: Results revealed that that the HSESIZE (number of bedrooms) were positively and
significantly correlated to the VALUE (house rent). This implies that the higher the pollution
numbers of bedrooms, the higher the rent. The results also indicate that EXPLEVEL
(exposure level to pollution) was negatively and significantly correlated to VALUE (House
rent). This implies that the higher the pollution exposure, the lower the rent. The results also
indicate that ESLVRS (Level of Ease to Recreational Facilities) was negatively and
significantly correlated to VALUE (House rent). This implies that the higher the difficulty of
accessing recreational facilities, the lower the rent. The results also indicate that ESLGDF
(Level of Ease to Garbage Disposal) was negatively and significantly correlated to VALUE
(House rent). This implies that the higher the difficulty of accessing garbage collection
facilities, the lower the rent. An R squared of 0.639 indicated that the goodness of fit of the
model was satisfactory. An F statistics of 6.917 and a pvalue of 0.000 indicate that the overall
model was significant.
Unique contribution to theory, practice and policy: Based on the findings, the study
recommended that more effort should be employed to construct a housing price index which
can be studied in its own right or be used as an explanatory variable in housing demand
equations. Large scale data should also be employed in order to achieve a more detailed
analysis.
Keywords: residential housing, demand, hedonic pricing approach

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1.0 INTRODUCTION
1.1 Background of the Study
The housing sector is very much associated with the economic health and wealth of a nation.
When the demand for housing is high other sectors of the economy will be able to realize
tremendous growth. Thus, research into the variables that contribute to property prices is
essential because the purchase of a residential property is both an investment decision as well
as a consumption decision. In the endeavor to model the housing prices, two approaches
have been widely used. The first approach is the monocentric model, where housing price is
assumed to be a function of an individual’s income. The relative housing prices then reflect
the relative savings in commuting costs associated with different locations.
However, unlike other consumption goods, the housing market is unique because it manifests
the characteristics of durability and heterogeneity. Thus, to model this differentiation
effectively, the second approach of the hedonic price model has been introduced. The
hedonic price model posits that goods are typically sold as a package of inherent attributes
(Rosen, 1974). Therefore, according to Rosen, (1974) the price of one house relative to
another will differ with the additional unit of the different attributes inherent in one house
relative to another house. The relative price of a house is then the summation of all its
marginal or implicit prices estimated through the regression analysis.
Economic models for hedonic markets characterize the valuation of attributes and
characteristics that constitute a good and the demand and supply of these attributes under
different assumptions about the market structure, individual preferences and the existing
technology. Hedonic regressions have been used to estimate the potential benefits of various
public projects. This approach is particularly attractive because unlike most of the other
approaches it can be applied to non market interactions such as externalities and public
goods. Its theoretical foundations have been discussed by Rosen (1974), Freeman (1979),
Polinsky and Sharrell (1976) among others. The hedonic pricing method is used to estimate
economic values for ecosystem or environmental services that directly affect market
prices. It is most commonly applied to variations in housing prices that reflect the value of
local environmental attributes. It can be used to estimate economic benefits or costs
associated with: environmental quality, including air pollution, water pollution or noise,
environmental amenities, such as aesthetic views or proximity to recreational
sites(Kanemoto,1988)
The basic assumption of the hedonic pricing method is that the price of a marketed good is
related to its characteristics, or the services it provides. For example, the price of a house
reflects the characteristics of that house—age, closeness to social amenities, neighborhood
characteristics e.t.c. Therefore, we can estimate the value the individual characteristics of a
house or a residential property by looking at how the price people are willing to pay for it
changes when the characteristics change. The hedonic pricing method is most often used to
when estimating the value of environmental amenities that affect the price of residential
properties. The method is based on the assumption that people value the characteristics of a
good, or the services it provides, rather than the good itself. Thus, prices will reflect the
value of a set of characteristics, including environmental characteristics, which people
consider important when purchasing the good. The hedonic pricing method may be used to
estimate economic benefits or costs associated with, environmental quality, including air

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pollution, water pollution, or noise environmental amenities, such as aesthetic views or

proximity to recreational sites among others.
The hedonic approach to benefit evaluation relies on the cross sectional capitalization
hypothesis which assumes mobility of households between different locations. Property
prices are higher in areas with better amenities or better public services otherwise many
households would want to move into an area and bid up the property prices. Perfect mobility
between different areas therefore ensues that property prices reflect the benefits of amenities
that property prices reflect the benefits of its amenities. This also holds if the amenities are
unpriced non market goods. (Kanemoto, 1988).
Markets accommodate diversity by establishing price that tends to make different things
relatively close substitutes at the margin. Adams Smith insight that markets tend to equalize
their net advantage is fundamental to these problems. If one good has more desirable
attributes than another, the less preferred variety must compensate by selling at a lower price.
Market prices reflect both the costs and values of underlying attributes of goods. Agents
implicitly use cost benefit analysis to choose locations in product spectrum with buyer
comparing the market prices of alternative varieties with their relative values in use, and with
sellers comparing the market prices with their relative costs. Equality between demand and
supply for each variety sustains the market equilibrium price quality structure.(Rosen,2001)
Hedonic price models have long been used to value not only the physical attributes of
housing units but also the surrounding location and environmental amenities. The hedonic
regression method regresses the product prices on its characteristics .In land and housing
markets, prices are regressed on housing attributes such as age, size and on site
characteristics, neighborhood characteristics location and public services. Environmental and
safety concerns are at the fore front of public policy today. The rhetoric and passions that
they arouse make it easy to forget that these goods are costly to produce and that rational
decisions require comparing their benefits with their costs, assessing the cost of these kinds
of public projects is like finding the cost of any other investment. Assessing benefits requires
estimating the willingness of consumers to pay for more safety and clean air. In practice, it is
tricky because there no explicit markets where safety and clean air can be directly traded and
from which demand values can be directly inferred. Instead safety and environmental quality
often are by products of other transactions and their valuation must be imputed from the
observed packages in which they play a part.(Herriges,Secchi and Babcock,2005)
In real estate economics, the hedonic pricing approach is used to adjust for the problems
associated with researching a good that is as heterogeneous as buildings. Because buildings
are so different, it is difficult to estimate the demand for buildings generically. Instead, it is
assumed that a house can be decomposed into characteristics such as number of bedrooms,
size of lot, or distance to the city center. A hedonic regression equation treats these attributes
(or bundles of attributes) separately, and estimates prices (in the case of an additive model) or
elasticity (in the case of a log model) for each of them. This information can be used to
construct a price index that can be used to compare the price of housing in different cities, or
to do time series analysis. As with Consumer Price Index calculations, hedonic pricing can be
used to correct for quality changes in constructing a housing price index. It can also be used
to assess the value of a property, in the absence of specific market transaction data. It can also
be used to analyze the demand for various housing characteristics, and housing demand in
general.

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The application of the hedonic price model to the housing market rests on several key
assumptions. First, homogeneity of the housing product is assumed. This assumption,
however, is arguable. It would be more accurate to view housing products as heterogeneous
because they can be differentiated in terms of location, structural, or neighborhood attributes,
or based on some other criteria as well, such as type of dwelling (bungalow, terrace house,
high rise apartment, or condominium).Another underpinning assumption is that the market
operates under perfect competition, and there are numerous buyers and sellers. This
assumption is justified as there are many buyers seeking housing in the market, and there are
also many housing developers that supply the housing. Thus, no individual buyer or supplier
can significantly affect the price of the properties because the purchases or sales of each
individual unit constitute a negligible portion of the market. (Dusse and Jonnes,1998)
Buyers and developers are deemed to have freedom to enter and exit the market. Unlike
some other industries, such as the petroleum and aviation industries that may have to comply
with certain requirements, there are neither constraints artificially imposed on the demand
and supply of housing, nor restrictions on the resources used to produce the housing product.
In practice however, there might be some budget constraints for the buyers. Likewise, for
developers, only those with enough capital can contemplate property development.
The assumption that buyers and sellers have perfect information concerning housing product
and price is quite reasonable, although one may still contend that perfect knowledge is
impossible to achieve in reality. The application of the hedonic pricing technique developed
by Rosen in 1974 to the consumer behavior under the conditions of risks and uncertainties
where the source of uncertainties is from non market hazards occurring in the natural
environment. Buying a house involves a substantial capital outlay. Thus, buyers will
endeavor to shop around to acquire as much information about the attributes of the units they
desire before making the purchase. Most of the relevant information, such as availability of
the housing unit, its price and attributes, is readily available in the newspapers, or can be
obtained from brokers and real estate agents. As for suppliers, perfect knowledge of their core
business and the market price enables them to increase their profits and utility, too. However,
such perfect information may never be fully realized in practice.(Kask and Maani,1992)
Finally, the hedonic price model only works under the assumption of market equilibrium, and
that there are no interrelationships between the implicit prices of attributes (Dusse & Jones,
1998). Market equilibrium is not plausible because there are imperfections in the real world
property market. It is idealistic to assume that the price vector will adjust instantaneously to
changes in either demand or supply at any point in time. The notion that there are no
interrelationships between the implicit prices of attributes is also fallacious because it implies
that the implicit price of an attribute does not vary throughout all areas and property types. It
is not necessarily true that all attributes will give the same level of utility or identical levels of
disutility to all buyers.
1.2 Problem Statement
How housing markets accommodate diversity of choice, tastes and productiveness is very
important in economic affairs of a nation. Little research and study on the hedonic pricing
approach in housing markets has been done in developing countries such as Kenya. Most of
the developing countries rely on price theory which focuses on the determination of price
and quantities of already defined goods but does little in the evaluation of the extensive

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margin by which a good and in this case, a residential property is chosen. It has not
incorporated the importance of heterogeneity and diversity of the attributes of a residential
property and the role that it plays in the determination of the price and choice of the same.
The purpose of this study is to use the hedonic pricing approach to show how differentiated
residential properties are valued according to their various attributes and characteristics. Little
research and study on the hedonic pricing approach in housing markets has been done in
developing countries such as Kenya. Most of the developing countries rely on price theory
which focuses on the determination of price and quantities of already defined goods but does
little in the evaluation of the extensive margin by which a good and in this case, a residential
property is chosen. It has not incorporated the importance of heterogeneity and diversity of
the attributes of a residential property and the role that it plays in the determination of the
price and choice of the same.
1.3 Research Objectives
To determine the effect of structural attributes of a property (house) on the price of the
property
To determine the effect of accessibility characteristics of a property (house) on the price of
the property
To determine the effect of neighborhood characteristics of a property (house) on the price of
the property
To determine the effect of environmental characteristics of a property (house) on the price of
the property
To derive policy recommendation from the study

2.0 LITERATURE REVIEW

2.1 Theoretical Framework
According to economists houses are typically treated as standard financial assets leading to
the conventional view that home ownership is quite risky. Since house price are volatile
home owners allocate a substantial proportion of their net worth to their housing facilities,
fluctuations in house prices can be said to have a sizable effect on home owner balance sheets
(Peter and Samwick, 1997). Further studies have shown that changes in housing wealth can
lead to significant changes in home owner’s consumption (Case, Quilly and Shiller 2003) and
the overinvestment in housing can distort their financial portfolio. (Mutwiwa, 2010)

Households that do not own a home must rent, purchasing their housing facilities on a spot
market and thus subject themselves to annual fluctuations in rent. Owners by contrast avoid
this rent uncertainty by buying a long lived asset that delivers a guaranteed steam of housing
services for a known up-front price Linnemann (1986). Rothenberg et al (1991) and Hensen
and Skak (2005) provide a theoretical argument for a range of economic determinants for
home ownership. They argue that individuals or households choose to own stock for which
housing services flow is optimal or welfare maximizing given their specific economic
conditions. They further argue that changes in economic conditions and environment may
lead to a change in the optimal choice away from ownership or into ownership
(Mutwiwa,2010)
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Housing characteristics and the process by which housing is constructed and occupied are the
key aspects of the living standards of the households in developing countries. In addition
housing is important to both the developed and developing economies because it is the largest
fixed capital investment that households make. Despite the predominance of the economic
determinism in housing demand, it should be noted that a number of factors which are not
necessarily economic, also play a role (Mitullah, 1993). These include characteristics of
people with respect housing needs. This includes household size, number of rooms occupied,
arrangement and the stage of the literature of the household. Adedokun (1989) notes that in a
number of political systems the failure of housing policy is related to the problem of the
wrong determination. Particular cultural housing values of a nation or people are quite
disregarded (Mutwiwa, 2010).
The housing sector is very much associated with the economic health and wealth of a nation.
A high demand for housing would trigger growth in many other economic sectors. Thus,
research into the variables that impact property prices is essential because the purchase of a
residential property is both an investment decision as well as a consumption decision.
However, unlike other consumption goods, the housing market is unique because it manifests
the characteristics of durability and heterogeneity. Thus, to model this differentiation
effectively, the second approach of the hedonic price model has been introduced. The
hedonic price model posits that goods are typically sold as a package of inherent attributes
(Rosen, 1974). Therefore, the price of one house relative to another will differ with the
additional unit of the different attributes inherent in one house relative to another house. The
relative price of a house is then the summation of all its marginal or implicit prices estimated
through the regression analysis.
Two main approaches contributed greatly towards the theoretical work on hedonic prices.
The first approach was derived from Lancaster’s (1966) consumer theory, and the second
comes from the model postulated by Rosen (1974). Both of these approaches aimed to impute
prices of attributes based on the relationship between the observed prices of differentiated
products and the number of attributes associated with these products. The Lancastrian model,
Rosen’s model, and the hedonic price model all surmised that goods possess a myriad of
attributes that combine to form bundles of characteristics (or objectively measurable, utility-
affecting attributes), which the consumer values; but these models have some fundamental
differences. The Lancastrian model presumes that goods are members of a group and that
some or all of the goods in that group are consumed in combinations, subject to the
consumer’s budget. In comparison, Rosen’s model assumes there is a range of goods, but that
consumers typically do not acquire preferred attributes by purchasing a combination of
goods. Rather, each good is chosen from the spectrum of brands and is consumed discretely.
The hedonic price approach also does not require joint consumption of goods within a group.
Thus, Lancaster’s approach is more suited to consumer goods, whereas Rosen’s model can be
associated with durable goods. Lancaster’s theory also assumes a linear relationship between
the price of goods and the characteristics contained in those goods. . In contrast, Rosen
postulated that unless it is possible for consumers to arbitrage attributes by untying and
repackaging them, a nonlinear relationship between the price of goods and their inherent
attributes would be more probable.

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According to Triplett (1986), hedonic methods were developed and employed in price
indices, long before their conceptual framework was understood. Bartik (1987) claimed that
the first formal contributions to hedonic price theory were those made by Court in 1941,
although there were other informal studies. For instance, Colwell and Dilmore (1999)
mentioned that Haas produced a hedonic study more than 15 years prior to Court, who first
published the term ―hedonic.‖ Etymologically, the term ―hedonics‖ is derived from the Greek
word hedonikos, which simply means pleasure. In the economic context, it refers to the utility
or satisfaction one derives through the consumption of goods and services.
Batra and Ahtola(1990) state that consumers purchase goods and services and perform
consumption behaviour for two basic reasons: First,consumatory affective(hedonic)
gratification and secondly, instrumental and utilitarian reasons. The first is a hedonic
dimension derived from sensations derived from experiencing the product and the second is a
utilitarian dimension derived from the functions performed by the product, measurements of
these attitudinal dimensions can provide researchers and managers with fresh approaches to
modelling marketing and pricing problems.
A review of extant literature reveals that many past studies that employed the hedonic price
model focused on location, structural, and neighborhood attributes.
The location of a property has been conceived in most studies in terms of fixed and relative
location attributes. The fixed location attributes (Follain & Jimenez, 1985; Oxford, 1988) are
quantified with respect to the whole urban area, and pertain to some form of accessibility
measure. Relative location attributes are quantified through surrogate measures such as socio-
economic class, racial composition, aesthetic attributes, pollution levels, and proximity to
local amenities (Dubin & Sung, 1990).

In the traditional view of location, accessibility is measured in terms of access to the Central
Business District (CBD). Accessibility, in whatever form it has been measured, has some
influence on housing prices (McMillan, Jarmin, & Thorsnes, 1992; Palmquist, 1992; Ridker
& Henning, 1968). Transport accessibility is frequently associated with the ease of
commuting to and from amenities, and is measured by travelling time, cost of travel,
convenience, and availability of different transport modes (Adair, Greal, Smyth, Cooper, &
Ryley, 2000; So et al., 1996). Buyers tend to trade-off housing costs against transport costs,
but this is not always true because Edmonds (1984) found that costs of commuting (fares)
may not be capitalised into site value. His study in Japan found that it is customary for firms
to reimburse employees for commuting. Thus, in that case, the only apparent ―costs‖ of
commuting were probably time and discomfort.
The positive influence of good public transport services on housing prices has also been
empirically examined. So et al.’s (1996) study in Hong Kong on transport accessibility,
measured by the distances to the nearest stations of the mass transit railway (MTR), buses,
and minibuses, revealed a high dependence on public transport in the territory. Consequently,
buyers were willing to pay more for properties with easy accessibility to work. Frequency of
transport services is also important. Hence, minibuses were found to be the most influential
determinant of house prices because they provide more frequent services than buses. Some
even ply twenty four hours on certain routes.

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Prices of properties are also frequently related to their structural attributes. As Ball (1973)
pointed out, if a house had more desirable attributes than others, the valuation of these
attributes would be reflected in higher market prices for this house. However, other
researchers have noted that structural attributes preferred by buyers may not always be
identical. Kohlhase (1991) found that the significance of structural attributes can change over
time, and may vary between nations. While attributes relating to the number of rooms and
floor area are relatively important across nations, other attributes change with the tradition of
building style or the climate.
Numerous studies reveal that the number of rooms and bedrooms (Fletcher, et al., 2000; Li &
Brown, 1980), the number of bathrooms (Garrod & Willis, 1992; Linneman 1980), and the
floor area (Carroll, Clauretie, & Jensen, 1996; Rodriguez & Sirmans, 1994) are positively
related to the sale price of houses. This is because buyers are willing to pay more for more
space, especially functional space. Residential properties with bigger floor areas are desired
by big families and buyers who can afford a better standard of living.
Researchers also surmised that building age is negatively related to property prices (Clark &
Herrin, 2000; Kain & Quigley, 1970; Rodriguez & Sirmans, 1994; Straszheim, 1975). This is
because ceteris paribus, older houses are worth less because they incur more costs in
maintenance and repair, and also have decreased usefulness due to changes in design,
electrical and mechanical systems (Clapp & Giaccotto, 1998). For example, Kain and
Quigley’s study showed that a new structure sold for more than an identical unit that was old.
However, Li and Brown’s (1980) study found an opposite effect of age on some buildings.
This increase in value was attributed to the historical significance or vintage effects of the
buildings. This led Clapp and Giaccotto (1998) to conclude that there are two components to
the age coefficient: a pure-cross sectional depreciation and obsolescence component, as well
as a demand-side component that changes over time.
Goodman (1989) argued that while neighbourhood attributes cannot be explicitly valued in
the market place, they could be implicitly valued through hedonic pricing by comparing
houses with differing neighbourhood qualities. Goodman’s caveat that failure to model
neighbourhood attributes can lead to substantive errors when valuing individual properties
and the market in general, was validated by Linneman (1980). Linneman found that between
15 and 50 percent of the standardised variation in site valuations is attributed to
neighbourhood attributes, and for structurally identical sites, as much as 100 percent of the
differential in site valuations is induced by neighbourhood attributes. Kain and Quigley’s
(1970) study further demonstrated that higher income households with more education prefer
to live in relatively high quality dwelling units located further away from the CBD.
Saphores and Benitez (2005), did a study on residential property values in four orange county
cities that were being affected by high levels of pollution. They analysed the micro level
impacts of local smelly pollutants emissions on the price of single family homes. By use of
the hedonic pricing method they found out that the presence of smelly polluters’ decreases
property value. Although this could also relate to the presence of other externalities such as
noise and congestion.
Ellen and Turner (1997) argue that the social network and crime rates in a neighbourhood
affect individual purchasing behaviour of a property (house). Home ownership rates may be
the underlying influence of these behaviours. They also suggest that the impact of

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neighbourhoods on an individual depends on the characteristics of the individual such as age,

gender and ethnicity or race.
Lansford and Jones (1995) use the hedonic price approach to determine the components of
the recreation and aesthetic value of a lake in central Texas. Specifically the implicit
recreational and aesthetic price placed on the Lake Travis by the home owners living near it
was investigated. They use the hypothesis that within certain proximity within the lake
residential property values reflect the recreational and aesthetic benefits received from the
lake by the residents. The hedonic study of the shoreline and near-a-lake properties captured
an important component of the recreational and aesthetic values that are provided by such
features and their effect on the property values within its proximity.
Scotchmer (1985,1986) examines the hedonic approach within a general equilibrium
framework and points out that even in a homogenous household case, the equilibrium price
function does not provide the correct benefit in the lot size since the lot size chosen by the
consumer is based on the housing attributes, there is not enough variation in the data to
permit full estimation of the hedonic price function. That is a certain lot size chosen for a
certain set of attributes and one cannot observe the price which would be established if the lot
size were different.
Bartik (1987) argued that the hedonic estimation problem is not the result of the interaction
between demand and supply because the individual consumer cannot affect the suppliers.
Instead, the hedonic estimation problem is caused by the endogeneity of both prices and
quantities of attributes in the context of a non-linear budget constraint. Hence, there is no
necessity to model the supply side of the market.
2.2 Empirical Review
Residential properties are multidimensional commodities characterized by durability,
structural inflexibility, and spatial fixity (Chau et al., 2001; So et al., 1996). Typically, the
housing attributes are classified into location attributes (L), structural attributes (S), and
neighborhood attributes (N). These attributes encompass both quantitative and qualitative
attributes (Goodman, 1989; Williams, 1991).
The market prices (P) of the property can, therefore, be expressed as:
P = f (L, S, N)………………………………………….. (1)
The partial derivative of the above hedonic function with respect to any attribute is the
implicit marginal attribute price, ceteris paribus (Rosen, 1974). This implicit price of the
housing attribute is revealed in the regression coefficient. All buyers perceive the amounts of
attributes embodied in the housing product to be identical, but their subjective valuations of
each component attribute may differ. The price of the house, then, is the sum of the implicit
prices for the attributes that are contained in it. Thus, the hedonic price approach enables the
possible influence of each of the many attributes on the house price to be tested and analyzed.
Numerous studies reveal that the number of rooms and bedrooms (Fletcher, et al., 2000; Li &
Brown, 1980), the number of bathrooms (Garrod & Willis, 1992; Linneman 1980), and the
floor area (Carroll, Clauretie, & Jensen, 1996; Rodriguez & Sirmans, 1994) are positively
related to the sale price of houses. This is because buyers are willing to pay more for more
space, especially functional space. Residential properties with bigger floor areas are desired
by big families and buyers who can afford a better standard of living. For example, Garrod

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and Willis discovered that an additional room increases a property’s value by about 7 %, and
an extra bathroom collecting twice that premium.

Forrest, Glen & Ward, (1996), These researchers claimed that lot size, the existence of a
basement, garage, patio, water heating system, one or more fireplaces, and/or an air heating
system are significantly related to the price of the dwelling (Garrod & Willis, 1992; Li &
Brown, 1980; Michaels & Smith, 1990). For example, Garrod and Willis noted that a single
garage adds a 6.9% differential and a double garage three times this amount, while central
heating adds about 6.5% to the price of the house.
Chau et al. (2001) classified the physical conditions of the property such as size, floor level,
age, and so forth as tangible attributes, whereas attributes such as accessibility, seaview,
environmental quality, and developer’s good will are regarded as intangible attributes.
According to Chau et al., buyers are willing to pay about 416 USD more per square foot for
properties constructed by large reputable developers. This is approximately 7% more than
average housing prices.

In terms of local government services, the quality of public schools has been found to have a
great impact on real house prices. School quality is more important to local residents
(especially those with children) than either crime or environmental quality (Clark & Herrin,
2000; Haurin & Brasington, 1996). The quality of schools has been measured in terms of
school input variables, such as expenditures per pupil or average cost per student (Ketkar,
1992), student achievement levels or Standardised Aptitude Test (SAT) scores (Jud & Watts,
1981; Ketkar, 1992; Walden, 1990). Generally, higher test scores have a positive impact on
property prices (Clauretie & Neill, 2000; Jud & Watts, 1981).
With respect to the hospitals, Huh and Kwak’s (1997) study in Seoul revealed that hospitals
exhibit a significant negative effect on property prices. The presence of a hospital is a liability
in Seoul because of cultural norms in Korea. When someone dies in Korea, the corpse is
placed in the hospital mortuary, and condolences are extended to family members and
relatives for three days. Proximity to hospitals and health centres is not desirable due to the
commotion that ensues including the nuisance value of ambulance sirens, the general
congestion in the vicinity of hospitals, as well as superstitious beliefs.
Places of worship, such as churches, irrespective of denominations and size, are amenities
that generally enhance the value of neighbourhood properties (Carroll et al., 1996). However,
Do, Wilbur and Short (1994) reported an exception, and suggested that the presence of
churches meant increased traffic and noise from church bells. Hence, property values in such
―theocratic environments‖ were reduced.
Undeniably, buyers are wary of areas of high crime and vandalism. Using the percentage of
persons aged between 16 and 21 years who are high school dropouts as a proxy measure for
crime and vandalism, Li and Brown (1980) found that buyers do not favour areas associated
with high rates of crime or vandalism. Clark and Herrin (2000) found that prices of
properties in Fresno County, California are 7.28% lower in areas with each additional murder
per 10,000 people. Crime has also been measured by other variables such as robbery, rape,

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aggravated assault, motor vehicle theft, and arson per 1,000 residents (Haurin & Brasington,
1996).
There are also studies on the externality of noise from traffic and its effect on property values
(Palmquist, 1992). However, the reaction towards noise, or quiet, is dissimilar among
different groups of people. Palmquist provided evidence that in an upper middle class
neighbourhood, property values were reduced by 0.48 % for each additional decibel of
highway noise, whereas in a lower middle class neighbourhood, this value was 0.3 % per
decibel. In the poorest neighbourhoods, the effect was even lower, only 0.08 % per decibel.
This indicates that in the case of the very poor, their marginal willingness to pay for quiet is
comparatively very low, or perhaps it is just due to their inability to pay.
Tomkins, Topham, Twomey, and Ward (1998), argue that airport proximity can be both
positive and negative. They found that the benefits of easy access to the airport and its
associated transport infrastructure outweigh the costs. For instance, a standard dwelling
located 2.5 km from the airport terminal commanded a price about 19% above one at the
mean distance. Feitelson et al. (1996), however, found that beyond a certain ―disturbance‖
level, buyers’ willingness to pay declines to zero, as they are no longer interested in the
properties. Espey and Lopez (2000) also found that there is a statistically significant negative
relationship between airport noise and prices of properties in proximity to the Reno-Sparks
airport, with houses where the noise level has been recorded at 65 decibels selling at
USD2400 less than homes in relatively quieter environments.
Proximity to shopping complexes and the size of shopping centres, have both been found to
exert an influence on the value of the surrounding residential properties (Des Rosiers et al.,
1996; Sirpal, 1994). Proximity to a shopping centre could mean easy access to facilities, and
reduced traveling costs, but this also might provide disadvantages in terms of noise pollution
and congestion. Shopping centre size affects the utility of centres. Des Rosiers, et al. found
that each additional shop adds about USD27 to the market value of the properties in the
vicinity of the shopping centre.
Not many of the previous studies have specifically examined the attribute of facilities on the
valuation of properties. Only Mok et al. (1995) and Tse and Love (2000) indicated that the
provision of facilities in large housing estates, such as a private clubhouse, swimming pool,
landscaped garden, gymnasium, and various kinds of sports facilities tend to increase the
prices of such properties. The reason could be recreational, since sports facilities are
associated with quality living.
Tyrvainen (1997) studied empirically and found that that external benefits, including pleasant
landscape, unpolluted air, serenity, quiet atmosphere, and the presence of urban forests,(by
using apartment sales data for residents in North Carelia, Finland.) On average, the results
showed that the inhabitants appreciate green housing districts and accessibility to forested
recreation areas. However, the effect of urban forests on prices of properties is non-linear, as
nearby forests may lower housing prices when located too close, while their impact of
increasing effect on price is dependent on their distance, size, and quality.
Chattopadhyay (1999), who conducted a study to gauge the willingness of buyers to pay for
reduced air pollution, found that residents in Chicago were willing to pay for a reduction in
the pollution level of particulate matter (PM-10) and sulphur dioxide. As for the quality of
water, Leggett and Bockstael (2000) reported that water quality, which was measured based

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on the concentration of faecal coliform bacteria, has a significant effect on property values,
too.
In Kenya Wahome (1984) analyzed a random sample of 200 households in Kibera area in
Nairobi to find out who benefits from site and service housing projects targeting the urban
poor. He found out that the projects benefit the middle and upper income groups. The
targeted group fails to benefit due to lack of finance to compete with the middle and upper
income groups. He concludes that the site and service projects are not a complete answer to
the housing problems in Nairobi. He recommends a matter of general policy that the subsidy
provided in public housing project should not be made available to all the classes of
prospective land users so that the resources are released to cater for more houses. He however
does not mention the importance of housing attributes in determining the house price and the
consumers’ willingness to pay for the property.

3.0 RESEARCH METHODOLOGY

In this study we employ hedonic pricing which entails people’s willingness to pay for a
property. The research design adopted will be a survey research to be able to conduct a
survey on the prices of residential housing in various parts of Nairobi which will indicate the
people’s willingness to pay for a given property based on its attributes. It is also both
qualitative and quantitative research. For the purpose of analysis the population to be sampled
will be based in Nairobi. I will focus on the Nairobi up market residential areas and the
Nairobi lower market residential areas. In this study the sampling frame consists of
residential housing facilities in both the up market and lower market Nairobi area. The
sample size will be specifically fifty five up market and lower market residents in Nairobi.
Short and simple questionnaires will be the main data collection method used to obtain the
primary data of the information.

4.0 RESULTS AND DISCUSSIONS

4.1 Descriptive Statistics
4.1.1 Normality Tests
Prior to estimation, the data was analyzed for normality. The importance of checking for
normality of data lies in the assumptions of OLS regression. The OLS regression assumes
that the data (the dependent variable) is normal. Skewness and kurtosis results indicated that
the dependent variable was normally distributed. A skewness of 1.082 implied that the data
was skewed to the right. As a rule of the thumb, skewness of between -2 and +2 indicates that
the distribution of the data is normal. This implies that dependent variable was normally
distributed. Kurtosis coefficient of -1.147 indicates that the peakedness of the distribution
is flatter than the normal distribution, hence it can be referred to as a platykurtic distribution.
However, the rule of the thumb is that kurtosis of between -2 and +2 is acceptable. This
further implies that the data can be regressed. A histogram presented in figure 1 also indicates
that the data is slightly skewed and platykurtic .

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Figure: Normality test

4.1.2 Descriptive results
Descriptive results in table 1 indicate that the mean gender distribution was 0.56. This implies
that 56% of the respondents were male. The mean age category was 2.29. This implies that
majority of respondents were aged between 20 to 29 years. This implies that majority of those
interviewed were youthful. Findings indicate that the mean value of house rent was 3.56.
This implies that majority of the houses were rented at ksh 30,000 to ksh 40,000. The
findings indicated that the house size was 2.8. This implied that the majority were three bed
roomed houses. The mean house age was 1.65. This implies that majority of the houses were
aged between 10 to 20 years. Results further reveal that the mean distance to Central
Business District (CBD) was 1.78. This implies that majority of the houses were situated 10
to 20 km away from the CBD.
The results indicated that the mean pollution was 2.67. This implies that majority of residents
experienced noise pollution probably from matatus. Findings further reveal that the mean
exposure to pollution level is 2.53. This implies that the residents were moderately exposed to
pollution.
Results also indicate that the mean rating for the ease of access to health centres is 2.67 which
implies that the majority of the residents found it easy to access health care. The findings
further indicate that mean rating for the ease of access to police station is 2.69 which implies
that the majority of the residents found it easy to access the police station. The findings
further indicate that mean rating for the ease of access to schools is 2.67which implies that
the majority of the residents found it easy to access the schools. The findings also indicate

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that mean rating for the ease of access to recreation facilities is 2.84 which implies that the
majority of the residents found it easy to access recreation facilities.
The findings also indicate that mean rating for the ease of access to garbage collection
facilities is 3.11 which implies that the majority of the residents found it easy to access
garbage collection facilities.
The findings also indicate that mean rating for the ease of access to commuter services
facilities is 2.75 which implies that the majority of the residents found it easy to access
commuter services.

Table 1: Descriptive Results

Std.
N Minimum Maximum Mean Deviation Skewness Kurtosis

GENDER 55 0 1 .56 .501 -.264 -2.005

AGE 55 2 3 2.29 .458 .947 -1.147

VALUE 55 1 11. 3.5636 2.80055 1.082 .308

HSESIZE 55 1 6 2.80 1.580 .723 -.560

HSEAGE 55 1 4. 1.6545 .75076 .945 .421

CBDDIST 55 1 4 1.78 .686 .667 .796

POLUTION 55 1 5 2.67 1.306 .227 -.950

EXPLEVEL 55 1 4 2.53 .836 .306 -.532

ESLVHC 55 2 4 2.67 .668 .489 -.701

ESLVPS 55 2 4 2.69 .605 .255 -.573

ESLVS 55 2 4 2.67 .610 .310 -.599

ESLVRS 55 2 5 2.84 .834 .719 -.127

ESLVGDF 55 2 5 3.11 .762 .073 -.654

ESLVCS 55 2 5 2.75 .799 .951 .594

4.2 Inferential Statistics
4.2.1 Correlation Results
Before running the regressions, a simple correlation analysis between the dependent and the
explanatory variables was carried out. Correlation results at the appendix indicate that the
HSESIZE (number of bedrooms) were positively and significantly correlated to the VALUE
(house rent)(R=0.398; pvalue=0.003). This implies that the higher the pollution number of
bedrooms, the higher the rent. The findings agree with numerous studies that reveal that the
number of rooms and bedrooms (Fletcher, et al., 2000; Li & Brown, 1980), the number of

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bathrooms (Garrod & Willis, 1992; Linneman 1980), and the floor area (Carroll, Clauretie, &
Jensen, 1996; Rodriguez & Sirmans, 1994) are positively related to the sale price of houses.
This is because buyers are willing to pay more for more space, especially functional space.
Residential properties with bigger floor areas are desired by big families and buyers who can
afford a better standard of living. For example, Garrod and Willis discovered that an
additional room increases a property’s value by about 7 %, and an extra bathroom collecting
twice that premium.
The results also indicate that EXPLEVEL (exposure level to pollution) was negatively and
significantly correlated to VALUE (House rent) (R= -0.549, p value=0.000) . This implies
that the higher the pollution exposure, the lower the rent. The findings agree with Palmquist
(1992) who noted that externality of noise from traffic had a negative effect on property
values.
The results also indicate that ESLVRS (Level of Ease to Recreational Facilities) was
negatively and significantly correlated to VALUE (House rent) (R= -0.285, p value=0.035).
This implies that the higher the difficulty of accessing recreational facilities, the lower the
rent.
The results also indicate that ESLGDF (Level of Ease to Garbage Disposal) was negatively
and significantly correlated to VALUE (House rent) (R= -0.463, p value=0.000). This implies
that the higher the difficulty of accessing garbage collection facilities, the lower the rent.
The other variables included in the correlation table were insignificantly correlated to Value
(house rent).
4.2.1 Regression results for the models
The model was then estimated using OLS. The goodness of fit was measured by the
coefficient of determination (R squared). An R squared of 0.639 indicated that the goodness
of fit of the model was satisfactory. This also implied that 63.9% of the variations in VALUE
(House rent) is explained by the independent variables. Only 36.1% of variation in House
rent are unexplained.
The F statistic in table 4.2 displays the over-all model significance. An F statistics of 6.917
and a pvalue of 0.000 indicate that the overall model was significant. In other words, the
independent variables are good joint predictors of house rent.
The regression model is as follows;

Regression coefficient of 0.80 indicates that an increase in house size (bedrooms) by one unit
leads to an increase in house value by 0.8. The relationship is significant since the p value is
0.000 and is less than the critical p value of 0.05.
Regression coefficient of -0.43 indicates that an increase in house age by one unit leads to a
decrease of house value by 0.43 units. However, the relationship is not significant since the p
value is 0.256 and is more than the critical p value of 0.05.

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Regression coefficient of -0.874 indicates that an increase in the distance to Central Business
District by one unit leads to a decrease of house value by 0.874. However, the relationship is
significant since the p value is 0.039 and is less than the critical p value of 0.05.
Regression coefficient of -1.638 indicates that a increase in Exposure Level to pollution by
one unit leads to a decrease of house value by 1.638 units. The relationship is significant
since the p value is 0.000 and is less than the critical p value of 0.05.
Regression coefficient of 0.366 indicates that an increase in Level of Ease to Health Centre
by one unit leads to an increase of house value by 0.366 units. The relationship is not
significant since the p value is 0.449 and is more than the critical p value of 0.05.
Regression coefficient of -0.391 indicates that an increase in Level of Ease of access to Police
Station by one unit leads to a decrease of house value by -0.391 units. The relationship is not
significant since the p value is 0.479 and is more than the critical p value of 0.05.
Regression coefficient of -0.785 indicates that an increase in Level of Ease of access to
schools by one unit leads to a decrease of house value by 0.785 units. The relationship is not
significant since the p value is 0.205 and is more than the critical p value of 0.05.
Regression coefficient of 0.564 indicates that an increase in Level of Ease of access to
recreation facilities by one unit leads to an increase of house value by 0.564 units. The
relationship is not significant since the p value is 0.200 and is more than the critical p value
of 0.05.
Regression coefficient of -0.688 indicates that an increase in Level of Ease of access to
garbage collection facilities by one unit leads to a decrease of house value by 0.688 units. The
relationship is not significant since the p value is 0.139 and is more than the critical p value
of 0.05.
Regression coefficient of -0.417 indicates that an increase in Level of Ease of access to
commuter services by one unit leads to a decrease of house value by 0.417 units. The
relationship is not significant since the p value is 0.322 and is more than the critical p value
of 0.05.

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Table 2: Regression Model Results

Standardized
Unstandardized Coefficients Coefficients
Dependent Variable:
VALUE B Std. Error Beta t Sig.

1 (Constant) 10.271 2.126 4.830 .000

HSESIZE .800 .172 .452 4.650 .000

HSEAGE -.430 .373 -.115 -1.151 .256

CBDDIST -.874 .410 -.214 -2.134 .039

POLUTION .492 .200 .229 2.464 .018

EXPLEVEL -1.638 .405 -.489 -4.049 .000

ESLVHC .366 .479 .087 .764 .449

ESLVPS -.391 .547 -.084 -.715 .479

ESLVS -.785 .610 -.171 -1.286 .205

ESLVRS .564 .434 .168 1.301 .200

ESLVGDF -.688 .456 -.187 -1.508 .139

ESLVCS -.417 .416 -.119 -1.002 .322

R Squared 0.639

F statistic 6.917 0.000

5.0 DISCUSSION CONCLUSIONS AND RECOMMENDATIONS

5.1 Discussion
The main objective of this study was to identify the residential housing demand in Nairobi
using a hedonic pricing approach. A hedonic pricing model was used to determine the House
and other property prices which are not simply determined by one variable, they are a product

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of a number of factors including: Characteristics of the property, characteristics of the

location, and characteristics of the environment.
The Hedonic valuation approach was preferable for this research since it’s the only technique
designed specifically to measure the impact of changes in quality characteristics of a property
on its market prices. Hedonic regressions of property values were used to estimate the
benefits of various public projects. This approach was particularly attractive because unlike
most of the other approaches it can be applied to non-market interactions such as externalities
and public goods.
The relationship among variables was analyzed with the help of SPSS and estimated using
Simple linear regression technique. Before running the regression for the model, the study
checks for normality of the data and a simple correlation analysis between the dependent and
the explanatory variables was carried out.
It is found that the coefficients of house age , Distance to CBD, level of exposure to
pollution, level of ease to access police station, level of ease to access schools, level of ease
to access garbage disposal facilities and the level of ease to access commuter services are
negative values as expected. It indicates that the larger the figures the lower the value of the
property. For instance if the property is old then the value goes down, if the distance to the
CBD is great then the value/house price becomes low. The same applies to the level of ease
of access to garbage facilities. If accessing is difficult then the value of the property goes
down and vice-versa is true. The values for the coefficient of ease of access to health centers
and schools are Positive which is unexpected. Meaning they may not have been sufficient to
explain the relationships of the variables. A Durbin Watson statistic of 1.784 also indicates
serial correlation of the variables.
5.2 Conclusions
The abundant studies that have employed the hedonic price model tend to indicate that values
of residential properties are positively and negatively correlated with desirable and
undesirable location, structural, and neighborhood characteristics. This generally applies to
all buyers. However, the attributes preferred may not necessarily be identical because of
cultural and idiosyncratic factors. This review and the empirical example demonstrate that
the hedonic price approach is particularly useful for research studies on the housing market in
Nairobi because high-rise properties have proliferated all over the city in the last decade,
partly due to high land costs and scarcity of developable land. The hedonic price model could
be used to investigate if buyers favor the current development in the property sector. The
implicit prices generated from the regression analysis will help give a more accurate portrayal
of the value or price of residential property traded in the market.
The hedonic price analysis is also very useful in that the implicit prices generated have the
potential to facilitate decision making by urban planners and policy-makers about where to
locate residential buildings, commercial buildings, schools, and so on. It is imperative that
planning should take into consideration the desired housing attributes valued by the
prospective buyers. Thus, the application of the model will help housing developers provide
quality housing, as they can better predict buyers’ preferences of attributes. Buildings having
attributes that align with buyers’ needs and preferences will improve the reputation, image,
and profit margin of the developers besides enhancing customer satisfaction. The general
public also stands to gain indirectly from better planning decisions made by the authorities

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and the judicious use of public money for facilities such as public schools, recreational parks,
and shopping complexes.
In conclusion, it is apparent that in spite of some inherent limitations, the hedonic price
model still holds promise as a very useful tool in the study of housing attributes and their
impact on property prices. To date, this approach has not being utilized directly and formally
by researchers in developing countries. Perhaps the time has come for this technique to be
given serious attention by researchers and all stakeholders in the housing industry in
developing countries. The feasibility of applying the hedonic price model to the study of the
housing market in Nairobi is justifiable, as buyers and sellers have perfect information on the
property market. The properties, too, manifest the characteristic of homogeneity. Hence, the
implicit prices for attributes can be established, and this information can be used to improve
the planning, development, construction, and management of properties in Nairobi.
5.3 Recommendations for further study
This study focused only on one city Nairobi, further studies can expand the focus to other
cities in the country, and also there is need for further research on the use of the hedonic
pricing approach in the housing industry by employing more sophisticated econometric
models. This will increase the accuracy of the results. More effort could also be employed to
construct a housing price index which can be studied in its own right or be used as an
explanatory variable in housing demand equations. Large scale data should also be employed
in order to achieve a more detailed analysis.

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