Real estate appraisal, or property valuation, requires strong expertise in order to be performed successfully, thus being a costly process to produce. However, with structured data on historical transactions, the use of machine learning (ML) enables automated, data-driven valuation which is instant, virtually costless and potentially more objective compared to traditional methods. Yet, fully ML-based appraisal is not widely used in real business applications, as the existing solutions are not sufficiently accurate and reliable.
In this study, we introduce an interpretable ML model for real estate appraisal using hierarchical linear modelling (HLM). The model is learned and tested with an empirical dataset of apartment transactions in the Helsinki area, collected during the past decade. As a result, we introduce a model which has competitive predictive performance, while being simultaneously explainable and reliable.
The main outcome of this study is the observation that hierarchical linear modelling is a very potential approach for automated real estate appraisal. The key advantage of HLM over alternative learning algorithms is its balance of performance and simplicity: this algorithm is complex enough to avoid underfitting but simple enough to be interpretable and easy to productize. Particularly, the ability of these models to output complete probability distributions quantifying the uncertainty of the estimates make them suitable for actual business use cases where high reliability is required.
