Comparing Multilevel Modelling and Artificial

Neural Networks in House Price Prediction

Yingyu Feng1, Kelvyn Jones2
School of Geographical Sciences and Centre for Multilevel Modelling
The University of Bristol, the United Kingdom
1
yf13468@Bristol.ac.uk
2
kelvyn.Jones@Bristol.ac.uk

The standard Hedonic Price Model (HPM) regresses the

Abstract— Two advanced modelling approaches, Multi-Level
Models and Artificial Neural Networks are employed to model
house prices. These approaches and the standard Hedonic Price
Model are compared in terms of predictive accuracy, capability
to capture location information, and their explanatory power.
These models are applied to 2001-2013 house prices in the
Greater Bristol area, using secondary data from the Land
Registry, the Population Census and Neighbourhood Statistics so
that these models could be applied nationally. The results
indicate that MLM offers good predictive accuracy with high
explanatory power, especially if neighbourhood effects are
explored at multiple spatial scales.
Keywords— House prices, Multilevel modelling, Artificial neural
networks, Predictive accuracy
I. INTRODUCTION
“Location, location, location” is frequently used by real
estate agents when marketing residential properties.
Numerous studies have demonstrated the importance of
location and the surrounding neighbourhoods of properties in
price determination. However, some neighbourhood attributes
may be unobservable, and it remains an open question of how
best to capture locational information in house price
modelling. Here we present two advanced quantitative
approaches, Multi-Level Models (MLM) and Artificial Neural
Network (ANN) and compared their predictive accuracy,
capability to capture location information, and explanatory
power against the baseline, widely-deployed, the standard
Hedonic Price Model (HPM). There is no published work to
date comparing ANN with MLM. The use of a much larger
dataset than previous publications is another important
contribution of this study.
 )
house prices on a range of its constituent attributes (e.g.
number of bedrooms, type of house, and distance to the city
centre ) and is usually calibrated using the ordinary least
squares (OLS) method. It has become a popular approach to
modelling house price as it is easy to apply and can reveal the
comparative size of effects of various property and
neighbourhood characteristics on house prices. There are
numerous studies using HPM to model house price (e.g. [1]-
[4]) and a number of reviews have also been conducted (e.g.
[5]-[8]).
Although this approach has been widely used, it does not
recognize that property and neighbourhood characteristics are
in fact measured at different scales. Moreover, all the
unexplained variation is assumed to be between individual
houses. The number of houses is not distinguished from the
number of neighbourhoods and the standard errors of the
measured neighbourhood variables will be under estimated.
There is a considerably increased chance of committing a type
1 error. Multilevel models are designed to analyse such
hierarchies and do not suffer these problems.
The HPM’s parametric nature is also questioned and semi-
or non-parametric models have been proposed, including
ANN as one of these non-parametric approaches such as [9]-
[12]. We now examine the MLM and ANN in more detail.
B. Multilevel Model
MLM combines the micro-level equation, describing the
within-neighbourhood between-house relationship for
individual properties and the macro-level equation, the
between-neighbourhood relationship, into one model. The
equation can be expressed as:
 =  +   + (  +   +
The rest of the paper is organized as follows. Section 2 Where 
and 
represent the house price and house
provides a schematic specification of each modelling
characteristic for level-1 house  in level-2 neighbourhood
approach and a review of previous studies utilising ANN and
(for example, house type), respectively. The
MLM. Section 3 considers how the models are operationalised,
parameters and  are respectively the mean price of non-
in terms of study area and data, scenarios to capture locational
information, and performance measures for competing models. detached houses (
=0) and the mean price differentials for
The results are presented in section 4 with the conclusions in detached houses ( 
=1) averaged across all
section 5. neighbourhoods. . The terms 
and 
represent the
unexplained price differentials of neighbourhood j for non-
II. SPECIFICATION OF HPM, MLM AND ANN detached and detached houses, and 
represents the
A. The Hedonic Price Model differential price for house i in neighbourhood . It is assumed
that the house-level residuals are mutually independent and
____________________________________
978-1-47- /1/$31.00 ©201 IEEE


follow a normal distribution 
~ (0,  ) and the with the aim to find the optimal connections between the
neighbourhood-residuals follow the distributional assumptions
denoted as:

 and output (e.g. house prices). Once the relationship is
  ~(0,    )

 

The variance  summarises the extent to which the non-
detached house price differential varies from place while

 summarises the extent to which the differentials for
detached houses differ between neighbourhoods. The
covariance assesses the extent to which a neighbourhood that
is expensive for non-detached properties is differentially
expensive for detached properties. These random effects are
unmeasured or latent variables representing the differential
‘desirability’ of a neighbourhood for non-detached and
detached property. This allows the unobserved neighbourhood
characteristics to play a role ‘behind the scenes’ in the effects
of the observed variables on house prices ([13]). We can
estimate these latent effects in the multilevel model and use
them in our predictions. The local estimates of residuals 
suitable for larger or smaller datasets. Reference [30] and [32]
and 
are precision-weighted and potentially “shrunken”
towards the overall mean relationship for all neighbourhoods
([14]). This means that the MLM estimates of the
neighbourhood effects are reliable and can be used to improve
predictions of prices by including these robust estimates of the
un-measured effects.
The model can include further house and neighbourhood
characteristics and the standard 2-level model can be easily
extended to more than two levels, or used for non-hierarchical
data where two types of higher-level units overlap with each
other in a cross-classified model.
There is only limited work employing MLM in house
prices research and no published work to date comparing it
with other modelling approaches either conceptually or
empirically in house price prediction. Most of the studies
examined the effects of house and various neighbourhood
characteristics on house prices (e.g. [15]-[20]) It has also been
used as a tool to segment house submarkets ([21], [22]) and
model spatiotemporal heterogeneity in house prices ([16],
[23]).
C. Artificial Neural Networks
ANN is a form of artificial intelligence that consists of a
number of interconnected processing elements, or neurons,
that mimic the functions of biological neurons to process
information in parallel ([24]). One of the most popular ANNs
is Multi-Layer Perceptron (MLP) as it is capable of mapping
the non-linear relationships within the data. MLP typically
contains an input layer, an output as the last layer, and one or
more hidden layer(s) between the input and output layer. Each
layer consists of a number of ‘neurons’, which are
interconnected to the neurons in the immediate adjacent layers
by a set of weights, representing the strength of connection. A
Back-propagation (BP) training algorithm as in [25] is
commonly used to train the ANNs, which calculate the errors
between the predicted output and the target output (actual
house price) and back-propagate the error to adjust the
connection weights between the neurons in adjacent layers

neurons that best map the relationships between inputs (e.g.
various attributes of individual houses and neighbourhoods)
established, the networks can be used to predict house prices.
We use a feed-forward ANN where neurons are only
connected forwards and there are no connections back as
feedforward is best suited (as argued in [26]) for modelling
relationships between a set of inputs and one or more output
variables.
The application of ANN in real estate started in 1990s.
Almost all the studies compared ANN with multiple
regression calibrated with OLS estimation, essentially the
standard HPM model, with few exceptions ([27], [28]). Some
found that ANN is superior to standard HPM in terms of the
predictive accuracy (e.g. [29]-[34]), but others found that this
was not necessarily so (e.g.[11], [12], [35]).
There is also no consensus as to whether ANN is more
have showed that a larger training set enhance predictive
capability since this approach excels at ‘learning’ from the
known data to estimate the ‘unknown’. But [12] prefers ANN
for smaller datasets as it predicts better and is less influenced
by outliers. All the studies to date have used relatively small
data set (less than 6,000 observations) with only two
exceptions as in [30] with 46,467 samples and [36] with
16,366 samples. The present study serves as a large-scale
empirical study using the largest dataset deployed in an ANN
approach to house price predictions.
III. DATA AND SCENARIOS
A. Setting and Data
This study selects Greater Bristol as the study area as it has
a diversified urban and rural mixture and includes affluent
suburbs and former social, local-authority owned housing. It
also has a mixture of different property types. The area has a
population of approximately 1.08 million people in 2009 and
covers around 1,342 km2 of land.
The house prices and property attributes are from the Land
Registry of England and Wales. Each record contains the
actual sold price, the date of the sale, the address, the unit
postcode, property type, duration (leasehold or freehold), and
whether the property is newly-built at the time of the sale. The
location of each sale is geocoded based on the unit postcode
of the property to obtain its Ordnance Survey National Grid
references so that the effect of location on house prices can be
modelled. The geographical locations of sold properties in
2001-2013 in Greater Bristol are displayed in Fig. 1.
Before obtaining the neighbourhood characteristics, it is
necessary to define the neighbourhood. This is also an
essential step in the MLM design which requires the higher-
level units to be pre-specified. We decided to use 2001 census
Output Areas (OAs) as the finest neighbourhood level because
OAs are designed to be homogenous in terms of household
tenure and property type. As house prices may be determined
by processes operating at a variety of spatial scales, we treat
neighbourhood as having multiple scales where OAs are seen
as nested in lower layer super output areas (LSOAs) and then
in middle layer super output areas (MSOAs), forming a Legend
´
strictly nested structure. The usage of these off-the-shelf <£100K
£100-400K
geography units allows the methodology to be applied £401-500K
nationally and routinely without time consuming and £501-700K
>700K
expensive research in the submarket delineation. The
neighbourhood characteristics are abstracted from 2001
census data and most of them are measured at the OA level
except the Index of Multiple Deprivation scores (IMD)
(measured at LSOA level) and neighbourhood median income
(estimated at MSOA level).

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Fig. 2 Average 2013 actual price by OAs in Greater Bristol

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1) Scenario 1: Property Characteristics Only

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House characteristics and the time of the sale are included

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in this scenario as predictors. The property characteristics are

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specified as full interactions representing 16 combinations of

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property type. Time of the sale is included as a third order

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polynomial to capture the time trend. No locational or

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measured neighbourhood characteristics are included in this

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scenario.
2) Scenario 2: Property Characteristics and Grid
References
Fig. 1 The geographical locations of sold properties in 2001-2013

In total 65,302 house sales were selected as the full sample
with up to 20 sales randomly drawn from each OAs. These
houses are nested in 3320 OAs, which in turn are nested in
653 LSOAs and 137 MSOAs. This is the biggest sample used
in applying ANN to model house prices and should provide a
good empirical test of the suitability of ANN for large datasets.
The total sample are split into training set (sales from 2001
to 2012) and testing set (2013). The training set is used for
model calibration and then predictions are made for the testing
set. This design allows the examination of house price
changes over a relatively long period and provides a stringent
and demanding test of the models in a period of substantial
market turbulence. We have mapped the actual mean house
price in 2013 by OAs (Fig. 2) and the predicted errors for the
same period will be presented in section IV.
B. Scenarios
Three scenarios are designed with different representations
of space and place. In all scenarios, a 4-level hierarchical
structure (houses nested in OAs, which in turn nested in
LSOAs, and then in MSOAs) is used for MLM. There is no
neighbourhood delineation indicator used in HPM or ANN as
they are not capable of handling a large number of binary
variables required for practical specification.
Building on scenario 1, the Grid references of property
location (Easting and Northing) are included as additional
explanatory variables. The polynomial expansion of the
coordinates in the model is also possible, which effectively is
a trend surface analysis ([37]), which is extended by [14] to a
multilevel approach. This scenario allows us to test whether
neighbourhood still matters when the locations of properties
are included in the model.
3) Scenario 3: Property and Neighbourhood Attributes
In this scenario the Grid references are replaced by
measured neighbourhood characteristics to examine whether
neighbourhood still matters when neighbourhood and property
characteristics are accounted for and whether locational
information is better represented by its absolute value or by
neighbourhood attributes. To facilitate model calibration and
interpretation, all continuous explanatory variables are group-
mean-centred so the intercept term represents the reference
property category in a typical neighbourhood.
Given that there are 20 neighbourhood variables, we have
examined the predictors for multicollinearity by calculating
variance inflation factors (VIFs) ([38]). Generally VIF greater
than 10 indicates potentially damaging multicollinearity. In
this set of neighbourhood characteristics, all the VIF are
below 10 and the majority are below 5, with the VIF for 2004
IMD score (VIF=8.89) and proportion of people have no
qualifications (VIF=7.38) being the highest.


C. Performance Measures changes. MLM remains to be the best performer in each
In order to reach a balanced view of a model’s performance, scenario with an average error
we have compared the model in terms of their goodness-of-fit, of £49k between the predicted and actual house prices
predictive accuracy and their explanatory power.  is used to (around 18% of the actual prices). This demonstrates that the
as the goodness-of-fit measure, Mean Absolute Error (MAE) extrapolation capability of MLM from modelled data to newly
and Mean Absolute Percentage Error (MAPE) as the accuracy unknown data is reasonably high, even when the housing
measures. We have also considered the face validity of the market has been very turbulent in the model calibration period
models, and we are particularly concerned with which 2001-2012.
variables are the most influential in determining the predicted TABLE Ċ
prices. The spatial distribution of the residuals are also
COMPARISON OF PREDICTIVE ACCURACY
examined by graphical presentation and Moran’s Index.
MAE MAPE MAE MAPE
IV. EMPIRICAL RESULTS AND DISCUSSION Test
(lnP) (lnP) (raw price) (raw price)
set
In total, 9 models are specified. HPM and MLM are fitted HPM1 0.319 5.89% 80.4 30.9%
in the software package MLwiN 2.32 ([39]) ANN models are MLM1 0.178 3.29% 48.6 17.5%
calibrated using IBM SPSS package version 21 ([40]) as this ANN1 0.318 5.85% 80.1 30.0%
implementation accepts categorical variables without the need HPM2 0.304 5.61% 77.0 29.4%
for manual transformation and has the inbuilt feature to MLM2 0.178 3.29% 48.6 17.5%
automatically select the number of hidden neurons. Due to ANN2 0.313 5.76% 79.0 29.8%
limited space, only the comparison results are presented here. HPM3 0.210 3.89% 25.3 20.7%
Detailed model results are available upon request. MLM3 0.178 3.30% 48.8 17.6%
ANN3 0.216 4.00% 55.7 20.9%
A. Goodness-of-fit
C. Model Explanatory Capability
The comparison of goodness-of-fit are presented in Table
ĉ . The  of HPM and ANN increase sequentially from We have also compared the explanatory capacity of each
scenario 1 to 3 for both in-sample and hold-out samples, but modelling approach, that is their ability to reveal the nature of
 of MLM hardly changes between different scenarios. This the estimated relationships and what still remains unexplained.
indicates that the locations are better represented by We only presented the results for scenario 3 where ANN and
neighbourhood characteristics than grid references for HPM HPM achieve the best goodness-of-fit and predictive accuracy.
and ANN. For MLM, because the influence of measured Table gives the size of effect of each neighbourhood
locational and neighbourhood information has already been variable and the 16 house types with for the range from the
represented by the multiple levels of latent place effects, the minimum to the maximum in thousands £. The relative
inclusion of grid references and measured neighbourhood importance of each input of ANN is also compared. ANN is
attributes does not t improve the goodness-of-fit. traditionally seen as rather opaque in revealing the
relationships between the inputs and the output. But the SPSS
TABLE ĉ implementation produces the relative importance for each
COMPARISONS OF GOODNESS-OF-FIT input variable using sensitivity analysis computed from the in-
sample data.
R2 (training set) R2 (test set) It can be seen that the average size of the property in OA,
HPM1 0.39 0.23 property characteristics and the time of the sale are very
MLM1 0.75 0.75 important predictors producing differences of over £100k
ANN1 0.39 0.23 These are similar to the ANN results, but there are also some
HPM2 0.43 0.3 major differences for some other predictors such as the
MLM2 0.75 0.75 percentage of old people and the 2004 IMD crime score
ANN2 0.41 0.26 between the two modelling strategies. It should be noted
HPM3 0.68 0.65 though that importance measure of ANN does not indicate the
MLM3 0.75 0.74
‘direction’ of the effects and there are no confidence intervals
ANN3 0.69 0.67
on the estimates. The exact effects are still very hard to
B. Predictive Accuracy quantify, especially for categorical variables such as the type
of property in ANN.
The accuracy comparisons are summarized Table Ċ ,
Another advantage of MLM is that it reveals how much
based on the testing set, 4141 properties sold in 2013. This remains to be explained and at what level. Fig. 3 shows the
shows how well these modelling strategies extrapolate to new percentage unexplained for a series of MLM models. In the
set of data based on historical house prices, at a time of a null model where no predictor is included, the total
turbulent market environment. Similar conclusions are unexplained variance is 100%, which is partitioned into 4
reached as in the goodness-of-fit comparison. The predictive levels. The majority of the price variation is at the macro
accuracy improve in HPM and ANN sequentially from MSOA level, meaning this macro geography play an
scenario 1 to 3, while the predictive accuracy of MLM hardly


important role in influencing house prices. The inclusion of
the property characteristics brings an improvement in the Null +Property +Neighbourhood
model and the unexplained variance reduces to 65%. Finally 100

Percent Unexplained
00 100

by including 20 neighbourhood predictors, there is a 80

substantial fall in the unexplained variance to 34% and the 80 80

majority of this now lies between properties. The macro 60

60 60

MSOAs remain to be the most important neighbourhood 40

40 40

scales. This means that some properties and some

20

neighbourhoods are desired over and above the attributes that 20

20

we are able to measure and that latent variable, that is 0

Total Prop OA LSOA MSOA 0
Total Prop OA LSOA MSOA
0
Total Prop OA LSOA MSOA

multilevel modelling, is needed and brings benefits.

Fig. 3 Percentage unexplained in log house prices in MLM model
TABLE ċ
EFFECT SIZE OF PREDICTORS BY MLM AND ANN IN SCENARIO 3
´
Min Max Range MLM ANN Legend
Variable Level
(£k) (£k) (£k) rank Rank ANN3 predicted error%
Room 121 323 202 OA 1 1 <-25%

4,12,1 25-50%
16 Types 121 311 190 House 2 >50%
4
Year 87 191 105 House 3 2
Degree 164 252 88 OA 4 3
Old 175 246 71 OA 5 19
Flat 178 227 48 OA 6 6
IMD04 154 196 42 LSOA 7 5
No_edu 162 202 40 OA 8 9
Black 150 187 37 OA 9 15
Unemply 175 212 37 OA 10 7
Det 160 194 34 OA 11 11
Occupy 184 211 27 OA 12 16
Young 171 197 26 OA 13 8
´
Pri_rent 184 208 24 OA 14 18 Legend

MLM3 predicted error%

LnIncom 174 197 23 MSOA 15 13 <-25%
25%-50%
IMDbar 177 200 22 LSOA 16 22 >50%
IMDenv 183 195 12 LSOA 17 23
Green 184 194 10 OA 18 20
Noheat 179 188 9 OA 19 21
Soc_rent 179 188 9 OA 20 17
Terrace 183 188 4 OA 21 24
IMD
184 189 4 LSOA 22 10
crime

D. Spatial Assessment of Model Residuals

In order to examine whether there is any spatial clustering
pattern of the residuals from the models, we present the
predicted error percentage of the actual price to Fig. 4 for the
results produced by ANN and MLM in scenario 3. We have
selected to only presented the over- and under-prediction by
more than 25% (representing around 10% on either end) as it
will give us a much clearer picture and we are more concerned
about the geographical distribution of the overly inaccurate
predictions. The patterns of residuals from the two models are
broadly similar, but there are fewer houses in each group (<-
25%, 25-50% and >50%) predicted by MLM than by ANN
model. There does not appear to be any obvious clustering,
but the Moran’s I statistics indicate there are still signification
positive autocorrelations between the residuals in all three
models in scenario 3. We are exploring spatial multilevel
models as in [41] to take account of this dependency.
Fig. 4 Predicted error percentage by ANN and MLM in Scenario 3
V. CONCLUSIONS
This paper compared MLM and ANN approach to
modelling housing prices with the widely accepted HPM
approach in terms of goodness-of-fit, predictive accuracy and
explanatory power. Neither ANN nor HPM is capable of
including neighbourhood delineation variables in the model
due to the large number of variables required for specification,
while MLM is able to specify by simply defining them as
macro-level units at multiple scales. All performance
measures show that MLM is superior to ANN and HPM in
each scenario, indicating that specification of neighbourhood
is helpful in house price predictions, even when the locations


or neighbourhood characteristics have been included in the
model. MLM also indicates how much variance remained to
be explained and at what level, providing further insights on
the importance of neighbourhoods. This study has also
demonstrated that ANN can be applied to large dataset, but its
predictive accuracy is not necessarily better than standard
HPM. This is contrary to many other studies that find ANN is
superior to HPM.
Further studies could extend it in a number ways, such as
allowing each neighbourhood to have its own time trend, or
permitting the effects of property characteristics to be
differential between neighbourhoods (random slopes model);
including cross-level interactions between property and
neighbourhood characteristics; and alternative definitions of
neighbourhood. While such developments would not
necessarily bring improved explanatory understanding, they
are likely to bring improved predictive accuracy. The
multilevel approach is capable of more fully exploiting the
data on both properties and neighbourhoods to achieve better
predictions, to understand what is driving the predictions and
pointing to what scale the unexplained elements are to be
found.
ACKNOWLEDGMENT
This work was supported by the Economic and Social
Research Council [grant number EDUC.SC3325]. The house
price paid data covers the transactions received at Land
Registry in the period 1st Jan 2001 to 31st Dec 2013. © Crown
copyright 2013.
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