have for a long time been concerned with the concept of “value".
However, the term has almost disappeared from economic textbooks
largely because economists believe that value has a number of
meanings. Price determination implies that for a good to have value
it must have utility, be scarce and there is a desire for it.
An object that lacks utility cannot have value because utility
arouses desire and the power to give satisfaction.
must be backed by purchasing power in order to constitute effective
demand and potential purchasers must be able to participate in
the market to satisfy their desires. If these conditions are met, the
price of a good determined in a market can be considered as the net
present value of the future benefit of owning the good.
Smith made an important distinction between value in use and value in
exchange. Real estate may have one value in use and a different value
in exchange. For example, a factory designed to make one product.
Value in use embodies the premise that an object's value is related
to its current use that is, a short run value which sits at odds with
the valuation concept that the market value of land is the present
value of all rents and benefits from today until perpetuity (because
the title is freehold). Therefore, valuers always consider market
value to be a long run value.
in exchange is relative, because the property is compared to other
substitute goods and services. A buyer of real estate always has an
opportunity cost of investment. For example, he/she could have rented
and invested the capital into the business instead of buying.
price or value in exchange is represented by the equilibrium price
determined by the supply and demand in the market. Market price is
the amount actually paid in a particular transaction. This is close
to the valuer's concept of market value.
type of competition prevailing in the market is ignored in this
definition. For example, no allowance is made for knowledge or
prudent conduct on the part of buyer or seller, degree and type of
stimulus motivating either or both, financing terms, the use for
which the property is best suited or is to be put, or the length of
time the property has been exposed to the market.
argue that there is consensus in the market place, and after
analyzing a large number of market transactions, very few are out of
line. In practice, problems with market transactions as evidence of
market value rarely arise.
value approximates market price and value in exchange when the
following conditions apply:
- no coercion or
undue influence over the buyer or seller
- both parties
are well informed
- the transaction
takes place over a reasonable time
- payment is in
cash or its equivalent.
valuation definition of market value in the willing buyer willing
seller theory covered previously includes these necessary
criteria. Most real estate transactions either meet the above
criteria or the effect of missing criteria is mitigated by the role
of the real estate agent and the nature of real estate.
real estate factors such land and buildings are relatively fixed.
That is, their quantity cannot be easily changed whereas other
factors, such as hours worked and seeds planted are "variable"
because their quantities can be easily changed. It is not possible to
increase the amount of the fixed input immediately (that is, in the
short run) and therefore, production can be increased only by
increasing the quantity of the variable input. Therefore, the cost of
producing a marginal unit will rise and the supply curve will shift.
In the long run, it will be possible to increase the amount of the
fixed input. For example, new factories can be built and industrial
land subdivided and if there are no further external changes, the
system will again attain equilibrium.
practice, equilibrium is rarely achieved being instead, a constantly
changing target toward which the system is moving rather than a state
that is maintained. That is, the real estate market is steady state.
The fixed supply of land and the long life of improvements makes it
particularly difficult to attain equilibrium in the real estate
specify the periods involved. The "market" period is a
short period in which the only items offered for sale are those
already produced. For example, in a livestock auction those animals
in the saleyards are the ones that establish the market price of
stock when sold.