Development of an Overseas Real Estate Valuation Model Considering Changes in Population Structure

Purpose – Although most studies on the value assessment of real estate have been assumed an increase in population. But, the aging phenomenon and the reduction in the number of economically active people have brought this assumption into question. A new real estate valuation methodology that reflects the changes in the population structure is thus needed. Research design and methodology - The relationship between demographic change and changes in real estate prices is analyzed using the ordinary least square (OLS) to estimate the parameters and a population structure change (PSC)-Binomial Option Model is developed to assessing the volatility of the estimated parameters. The results of the discounted cash flow (DCF), binomial option and PSC-binomial option models are compared based on data drawn from Seoul and Shanghai. Results - The results of the DCF method show that investing in Seoul is better than investing in Shanghai, but the binomial option shows that investing in Shanghai is better. Because real estate prices were declining in Seoul and rising in Shanghai during the decision-making, period (September 2013), the binary option model is believed more accurate than the DCF method. The new model, the PSC-binomial option model, reflecting the change in population structure, gives higher values 24.6 million won in Seoul and 43.3 million won in Shanghai than those given by the binomial options model. Conclusions - This study suggests that applying the changes in the population structure to the existing research, such as in the binomial option model, represents a more accurate real estate valuation method. The research results show that the new model is more accurately than existing models such as the DCF or binomial option model.