Spatial weight matrix impact on real estate hierarchical clustering in the process of mass valuation

Research background: The value of the property can be determined on an individual or mass basis. There are a number of situations in which uniform and relatively fast results obtained by means of mass valuation undoubtedly outweigh the advantages of the individual approach. In literature and practice there are a number of different types of models of mass valuation of real estate. For some of them it is postulated or required to group the valued properties into homogeneous subset due to various criteria. One such model is Szczecin Algorithm of Real Estate Mass Appraisal (SAREMA). When using this algorithm, the area to be valued should be divided into the so-called location attractiveness areas (LAZ). Such division can be made in many ways. Regardless of the method of clustering, its result should be assessed, depending on the degree of implementation of the adopted criterion of division quality. A better division of real estate will translate into more accurate valuation results.

Purpose of the article: The aim of the article is to present an application of hierarchical clustering with a spatial constraints algorithm for the creation of LAZ. This method requires the specification of spatial weight matrix to carry out the clustering process. Due to the fact that such a matrix can be specified in a number of ways, the impact of the proposed types of matrices on the clustering process will be described. A modified measure of information entropy will be used to assess the clustering results.

Methods: The article utilises the algorithm of agglomerative clustering, which takes into account spatial constraints, which is particularly important in the context of real estate valuation. Homogeneity of clusters will be determined with the means of information entropy.

Findings & Value added: The main achievements of the study will be to assess whether the type of the distance matrix has a significant impact on the clustering of properties under valuation.