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Analysis of the Mass Appraisal Model by Using Artificial Neural Network in

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Journal of Modern Accounting and Auditing, ISSN 1548-6583
October 2011, Vol. 7, No. 10, 1080-1089

Analysis of the Mass Appraisal Model by Using Artificial

Neural Network in Kaohsiung City

Lai Pi-ying (Peddy)

National Pingtung Institute of Commerce, Taiwan, China

An accurate assessment of the property value is very important to make a deal, property tax, and mortgage for loan.
The mass appraisal system has been developed in some foreign countries, especially in American for a long time. In
Taiwan, we still have few experiences in using computer-assisted mass appraisal system, especially using artificial
neural network (ANN). This article has two objectives: (1) to illustrate application of ANN to the Kaohsiung
property market by the method of back-propagation. The study is based on the properties data of sales price, we
also use multiple regressions in the same data; (2) to evaluate the performance of two models by using the mean
absolute percentage error (MAPE) and hit ratio (HR). This paper finds that using artificial neural network (ANN) is
able to overcome multiple regressions’ methodological problems and also get better performance than multiple
regression model (MRA). These results are useful in helping local government to assess their assessment value.

Keywords: artificial neural network (ANN), multiple regression model (MRA), computer assisted mass appraisal,
housing price

Introduction
There is a predominant use of multiple regression models in housing price model and forecasting. One of
the problems with the regression method is that it relies on functional assumptions to ascribe a form to fit the
relationships of the variables. The artificial neural network (ANN) technique is a method designed to capture
functional forms automatically, allowing the uncovering of hidden nonlinear relationships between the
modeling variables. This method rapidly rises in these few years, especially using information area, the
performance is very outstanding. It is a sub-field of computer science concerned with the use of computers in
tasks that are normally considered to require knowledge, perception, reasoning, learning, understanding and
similar cognitive abilities (Gevarter, 1985). Neural network has the parallel study, the high speed computation,
the well wrong tolerance, and the non-linear processing ability, it is applied to the property price forecasting in
recent years.
This paper applies ANN technology to real estate appraisal in Kaohsiung city market. We try to develop a
predictive model of the housing price by the method of back-propagation artificial neural network. The so
called back-propagation (BP) model has been the most popular and most widely implemented of all the neural
network paradigms. The BP is the multi-layer feed-forward neural networks which consist of a series of simple
interconnected neurons, or nodes between input and output vectors. The nodes are connected by weights and

Lai Pi-ying (Peddy), Ph.D., associate professor, Department of Real Estate Management, National Pingtung Institute of
Commerce.
 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK 1081

outputs signals, which are functions of the sum of the inputs to the node modified by an activation function.
The output of a node is scaled by the connecting weight and fed forward to be an input to the nodes in the next
layer of network (Ge, Runeson, & Lam, 2003). It is assumed a fully connected feed forward network, which
means activation travels in a direction from the input layer to the output layer, and the units in one layer are
connected to every other unit in the next layer up (Callan, 1999). Recurrent connection of back propagation is
an extension of BP model in which the network combines feedback and feed forward mechanisms. This means
that there is a single time-step delay through the network, with the output feeding back to the neurons at the
same time as external inputs (Chester, 1993).
We will investigate several aspects of the use of neural networks as a tool for predicting residential
property value. This paper is organized in the following way. In section 2, we review some papers using neural
networks model in the property valuation. In section 3, we deal with Kaohsiung’s real estate market by neural
networks model and multiple regression model. In section 4, we present some results. Finally, we showed some
concluding remarks.

Literature Review
Most housing prices forecasting models have used multiple regression analysis (MRA) methodologies
(Reichert, 1990; Winky & Ganesan, 1998). The problem with this method is that it has involves human
judgment because it relies on functional assumptions to ascribe a form to fit the relationships of the variables.
However, multiple regressions have often produced serious problems for real estate appraisal that primarily
result from multicolinearity issues in the independent variables and from the inclusion of “outlier” properties in
the sample. It is difficult to map multi-attribute nonlinear relationships using regression analysis and make
multiple regressions an inadequate model for a market that requires precise and fast responses (Brunson,
Buttimer, & Rutherford, 1994; Do & Grudnitski, 1992). ANN could overcome these problems because they
have the ability to learn by themselves, to generalize solutions, and to respond adequately to highly correlated,
incomplete, or previously unknown data (Shaw, 1992).
Property appraisals are often required for asset valuation, property tax and/or insurance estimations, sales
transactions and land planning situations. The sales comparison approach is widely considered the most
appropriate approach for valuing residential real estate. Traditionally, the sales comparison method has been
used in the sales comparison approach to justify the property value. More recently, hedonic pricing models
have also been used to identify the real estate price.
Tay and Ho (1991) have used the BP model in estimating sale prices of apartments comparing it against
the traditional MRA model. It is important to note that the Do and Grudnitski (1992) neural network model
resulted in having almost twice the number of predicted values within 5% of the actual sales price than their
regression model had predicted (40% vs. 20%) on a test sample of 105 houses. They concluded that the neural
network model performs better than a multiple regression model for estimating the value of U.S. residential
property. Eight attributes were used as independent variables (age, number of bedrooms, number of bathrooms,
tool square footage, number of garages, number of fireplaces, number of stories, and lot size) and the selling
price was used as the dependent variable. Their neural network model was formed with three nodes in the
hidden layer. McCluskey, Dyson, McFall, and Anand (1997) also indicated that neural networks provide
superior predicative ability in comparison to the multiple regressions in Northern Ireland. Results of their
research are summarized in Table 1.
1082 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK

Table 1
Summary of Literature Results
Authors Sample time/country Sample Results (MAPE)
ANN: 6.9%
Do & Grudnitski (1992) 1992/U.S. 105 residential properties
MRA: 11.3%
Training sample: 833
ANN: 3.9%
Tay & Ho (1991) 1991/Singapore Test sample: 222
MRA: 7.5%
Total: 1055
ANN1: 3.48%
Evans et al. (1991) 1991/England & Wales 34
ANN2: 5.03%
Training sample: 378
ANN1: 15. 7%
McCluskey et al. (1997) 1997/Northern Ireland Test sample: 138
ANN2: 7.75%
Total: 416
McGreal, Adair, McBurney, & ANN: 10%
1992-1993/England 1026
Patterson (1998) ANN: 15%
Lenk, Worzala, & Silva (1997) 1997/ ANN: 15%
Training ample 217
Worzala, Lenk, & Silva (1995) 1993-1994/US Test sample: 71 ANN: 13.2%
Total: 288
Training sample 137
ANN1: 8.7%
Borst (1992) 1992/US Test sample: 43
ANN2: 12.4%
Total: 180
ANN1: 11%
Din, Hoesli, & Bender (2001) 1978-1992/Switzerland 285
ANN2: 15%
Training sample: 54
Test sample: 17 Forecasting error:
Ge et al. (2003) 1981-2001/Hong Kong
Forecast: 17 26%, 59%, 61%
Total: 88
Note. ANN means artificial neural network, MRA means multiple regression analysis.

Evans, James, and Collins (1991) tested neural networks for accuracy in valuation when estimating
residential property prices in England and Wales. They investigated the effects on the average prediction error
when outliers in both the training data and the test data were removed. They concluded that when outliers are
removed from the data sets, neural network models work well to value property. The average absolute error for
their neural network models ranged between 5% and 7%.
Not all studies have reported successful or favorable results from the use of neural networks. Allen and
Zumwalt (1994) reviewed a number of these studies and presented an example of what can occur when
different neural network models are used for predicting stock price movements. They concluded that optimal
neural network models depend upon the specific data sets and time periods involved. In addition, they found
that the same data combined with different model settings (e.g., model tolerance, number of hidden nodes,
number of hidden layers, etc.) can produce opposite results. Thus, they strongly recommended caution during
the development and use of neural network models in finance-related fields.
 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK 1083

Methodology
Data
The basis of this research was obtained from the statistics of housing price of land administration bureau
in Kaohsiung city. Table 2 has defined of variables used in the model.

Table 2
Variables Description
Variables Priori hypothesis Definition Units
The administration district: (1) 1 if the house is located in
Yancheng district, Gushan district, Sanmin district, Sinsing
LOCATION ＋ district, Cianjin district, Lingya district, Cianjhen district; Dummy variables
(2) 0 if is located in Zuoying district, Nanzih district, Cijin
district, Siaogang district.
ROADW ＋ Road width. Meters
The location of land: (1) 1 if the land is located in corner
ROADS ＋ lot, near street, not near street lot; (2) 0 if the land is located Dummy variables
in the lot of over lot line.
Type of house: (1) 1 if the house is single house &
TYPE － Dummy variables
apartment; (2) 0 otherwise.
Structure material of house: (1) 1 if the material is RC,
STRUCT ＋ Dummy variables
SRC; (2) 0 if material is bricks.
AGE － Age of the house. Years
TOTFLOR ＋ Total floor of the house. Floors
Land zoning: (1) 1 if the land zoning is commercial; (2) 0
ZONING ＋ Dummy variables
residential.
BUILAREA ＋ Building floor area. Square meters

The Model of Hedonic Price and Artificial Neural Network

Hedonic price model. The hedonic model involves regressing transferred for the house against those
attributes of a house hypothesized to be determinants of the transaction price in Kaohsiung city. Attributes
hypothesized to contribute to the price of the house include the location (the administration district) (see Figure
1), road width (in meters), the location of Land (near street situation), type of house, structure material of house,
house age (in years), total floor of the house (in floors), land zoning, building floor area (in square meters).
Implicitly, the model for hedonic price function is specified as:
PRICE = α + β1 LOCATION + β2 ROADW + β3 ROADS + β4Type
(1)
+ β5 Struc + β6 AGE + β7Totflor + β8 Zoning + β9 Bui + β10
Artificial neural network model. A neural network system is an artificial intelligence model that
replicates the human brain’s learning process. The brain’s neurons are the basic processing units that receive
signs from and send signals to many nervous system channels throughout the human body. When the body
senses an input experience, the nervous system carries many messages describing the input to the brain. The
brain’s neurons interpret the information form these input signals by passing the information through
synapses that combine and transform the data. A response is ultimately created when the information
processing is complete. Through repetition of stimuli and feedback of responses, the brain learns the optimal
processing and response to the stimuli. The brain’s actual leaning path is still somewhat of a chemical
mystery; what is known is that learning does occur and reoccur through the repetition of the input stimuli and
the output response.
1084 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK

Figure 1. Geographical distribution of 2,471 real estate transcription cases in Kaohsiung city.

Artificial neural network was developed utilizing this “black box” concept. Just as a human brain learns
with repetition of similar stimuli, a neural network trains itself with historical pairs of input and output data.
Neural networks usually operate without an a priori theory that guides or restricts the relationship between the
inputs and the outputs. The ultimate accuracy of the predicted output response, rather than the description of the
specific path or relationship between the inputs and the output response, is the goal of the model. The typical
topology of three layer recurrent back-propagation is illustrated in Figure 2.

Input layer Hidden layer Output layer

--neurons

Location
Road width
Roads
Type
Structure Neural network model Housing price
Age
TOFLOOR
Zoning
BUILAREA

Figure 2. The processing element of artificial neuron network.

 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK 1085

Figure 2 illustrates the three types of layers of nodes: the input layer, the hidden layer and the output layer.
The input layer contains data from the measures of explanatory or independent variables. The data is passed
through the nodes of the hidden layers to the output layer, which represents the dependent variables. A
nonlinear transfer function assigns weights to the information as it passes through the hidden layer nodes,
mimicking the transformation of information as it passes through the brain’s synapses. The goal of the artificial
neural network model is that the effect of these the relationship that really exists between the input independent
variables and the output, or dependent variables.
The Performance of Model
This method of error correction is usually referred to as back-propagation. The objective of the neural
network is to find the set of weights for the explanatory variables and minimize the error between the neural
network output and the actual data (Allen & Zumwalt, 1994).
Two criteria were used for comparing the performance of the different models: (1) the mean absolute error
between the predicted and actual selling price of the samples, including RMSE and MAPE; (2) hit ratio in the
sample between the predated and selling price of the sample. The best model for predicting actual sales prices
was determined to be the one that resulted in the lowest mean absolute percentage error and/or the highest
percentage of predicted sales price with absolute error below 5% of the actual sales price.
The data model with a smaller MAPE is deemed superior. This error measurement attempts to produce a
single number that represents the total error for all properties. This error measurement fails, however, to
provide information as to how the error deviates between the properties. For example, if a model provides
extremely accurate results for 90% of the properties tested while providing horribly inaccurate results for 10%
of the properties tested, the MAPE value for this model may be comparable to another model with unacceptable
results (i.e., a large standard deviation in error, but with a comparable MAPE). The MAPE is defined as (3).
(1) Root mean squared errors (RMSE) is defined as:
n
R M SE = ∑
i =1
ei2 / n (2)

ei = y i − yˆ i
(2) Mean absolute percentage errors (MAPE) is defined as:
n
et
∑
i =1 yt et = y t − yˆ t (3)
M APE = × 100% ( y t ≠ 0)
n
(3) Hit ratio is defined as:
Hit Ratio Range = y − y (α ) ≤ yˆ ≤ y + y (α ) (4)
where Y: selling price of sample; α: confidence level at 5%, 10%, 20%.
n
HitRatio = × 100 ﹪ (5)
N
where n: number of hit ratio; N: total sample.

Empirical Results
Forecasting Result of MRA Model
The statistical analysis was carried out using the regression procedure. The results of the MRA revealed
1086 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK

that all the variables entered were statistically significant at the 5% significance level, and the R-square value
obtained was 69.4%. The results of the analysis are shown in the Table 3. Among all the variables, the ones
with positive signs of coefficient were location for properties, ROADW, ROADR, AGE for building, Total
floor, Zoning for land, and BUILAREA for building floor area. Those with negative signs were: Type for
building use; STRUC for building. According to the economic theory, age is expected to have an inverse
relationship with housing price but the reverse was obtained from the analysis. This departure from theory may
be justifiable in the case of Kaohsiung city as it was seen that the age for building grew even with soaring
housing price. In Kaohsiung city, the housing price was affected by land price and real estate market, not by the
age. Besides, the old building was located in the tradition downtown and the price of those transaction
properties were even higher than the newly building in the suburban district. This may also help to account for
the inverse relationship obtained for age of building.

Table 3
Estimated MRA Model for Housing Price in Kaohsiung City
Variables Coefficient t-value P-value VIF
Constant 5.0643 134.130 0.0000
LOCATION 0.1311 9.600 0.0000 0.759 1.318
ROADW 0.0039 5.970 0.0000 0.958 1.044
ROADR 0.2488 18.220 0.0000 0.717 1.395
TYPE -0.1699 -8.050 0.0000 0.814 1.228
STRUCT -0.0209 -1.300 0.1950 0.495 2.022
AGE 0.0018 2.730 0.0060 0.088 11.303
TOTFLOR 0.1399 26.070 0.0000 0.085 11.751
ZONING 0.1008 6.790 0.0000 0.545 1.835
BUILAREA 0.0034 34.430 0.0000 0.755 1.324
S = 0.2888 R-Sq = 69.4% R-Sq (adj) = 69.3%
Analysis of variance
Source DF SS MS F P
Regression 9 465.744 51.749 620.61 0.000
Residual error 2461 205.211 0.083
Total 2470 670.955

Forecasting Result of ANN Model

The ANN model was trained from a set of data. For a particular input, an output (housing price) is
produced from the model. Then, the model compared the model output to the actual housing price. The
accuracy of the value is determined by the total mean square error and then back propagation is used to attempt
to reduce prediction errors, which is done through the adjusting of the connection weights. The performance of
network can be influenced by the number of hidden layers and the number of nodes that are included in each
hidden layer. The trial-and error process is applied to find the optimal artificial neural network model (Figure 3).
We used the Alyuda software to construct the artificial neural network model. In accordance to standard
analytical practice, the sample size was divided on a random basis into two sets, namely the training set and the
test set (see Table 4). The training set and test set contain 70 and 30% of the total sample, respectively (Figure
4). The input importance of all variables of the best artificial neural network is shown in Figure 5. In Figure 5
shows that building floor area and the relationship of land which was located in the street are important factors
 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK 1087

that determine the housing price.

Iterations trained: 5136

Figure 3. ANN training error graph.

Table 4
Summary of ANN Model
Training set Test set
Number of rows 1730 741
CCR n/a n/a
Average AE 0.171307304 0.245053386
Average MSE 0.051925714 0.097567413
Tolerance type Absolute Absolute
Tolerance 2 5
# of good forecasts 1730 (100%) 741 (100%)
# of bad forecasts 0 (0%) 0 (0%)
R Squared: 0.7584 Correlation: 0.8762

Figure 4. Actual & forecast price in ANN model.

Results of Comparative Study With MRA and ANN Model

The results of the comparative study are given in Table 5. As shown in Table 5, the R-square from neural
network model is higher than the R-square from MRA model. The results imply that the neural network model
can estimate the housing price more accurately than MRA model. The MAPE by MRA and ANN model were
found to be 23.71% and 19.02%.
1088 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK

As shown in Table 5, the MAPE of the forecast generated by the ANN model was to be 19.02. For the
MRA model the MAPE was found to be 23.71%. 35% of hit ratio of the predicated price are within 10% of the
actual price and 62% are within 20% of the actual price in ANN model. Comparing to the MRA model, the
ANN model performs better than the MRA.

BUILAREA 29.204%

ZONING 9.722%

TOTFLOR 14.513%

AGE 13.318%

Type 5.503%

STRUCT 1.111%

ROADR 15.376%

ROADW 6.553%

Location 4.700%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Figure 5. Input importance of variables in ANN model.

Table 5
Comparison of the Results MRA & ANN Model
Hit ratio
R2 MAPE
5% 10% 20%
MRA 69.4% 23.71% 13.15 26.75 50.30
ANN 75.84% 19.02% 18.05 34.76 61.88

Conclusions
This study employs recurrent artificial neural network to produce housing price models in Kaohsiung city.
From our empirical study, we found that MRA model will generate more forecasting error than the ANN model.
This is due to the nature of neural network model. The model are designed to capture the non-linear
relationship between the input and output variables automatically, without having to specify the non-linear
terms to fit the data. This research investigated the merits of applying neural network technology to the problem
of real estate appraisal.
Furthermore, the results found in this research could be a function of the specific data characteristics of the
sample used. It may be possible that neural networks will do a much better job than multiple regressions if the
nonlinear relationships between the variables are greater. Especially, no matter what the RMSE, MAPE & Hit
Ratio, the performance of ANN model is better than MRA in Kaohsiung city.
As we mentioned the literature review, our results is similar to the empirical results of McGreal et al.
(1998); Din, Hoesli, and Bender (2001); Wong, Albert, and Hung (2002).
Finally, the software randomly generates the input importance for each of the nodes in the hidden layer.
Hence, the ANN is recommended when there is sufficient sample data set, or when there is no theoretical basis
for the data specification. Therefore, continued research in this area is important and necessary before the final
 ANALYSIS OF MASS APPRAISAL MODEL BY USING ARTIFICIAL NEURAL NETWORK 1089

verdict on the use of neural networks in real estate appraisal can be decided.

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