What are the factors that cause a mansion erected in a slam area to lose its value? Or a parcel of land in the midst of commercial establishments to rise up in value?
The answers to these questions can be best explained by first finding out what is the meaning of Price, Cost, and Value from the context of Real Estate.
What is Price? Price is an expression of an individual’s estimate of value in terms of money.
What is Cost? Cost is the combination of the factors of production to produce improvement or development.
What is Value? Value is the utility or attribute of a property to satisfy human want or command other properties in exchange.
Value has three elements:
Scarcity. Property increases its value when the supply is limited.
Utility. The power of a good to render a service or fill a need.
Demand. The desire of a good or service; implemented by purchasing power.
The Economic Principles of Value
Principle of increasing and diminishing returns. “When one of the factors of production is held fixed in supply, successive additions of the other factors will lead to an increase in returns up to a point, but beyond this point returns will diminish.” - Anne Robert Jacques Turgot.
Principle of highest and best use. The value of property is directly related to the use of that property.
Principle of regression. A property of higher quality in a neighborhood of properties of lower quality seeks the value level of the properties of lower quality.
Principle of substitution. The maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property.
Principle of progression. The value of a property of a lesser quality will tend to be increased by being in association with properties of higher quality in the same area.
Principle of conformity. The house will more likely appreciate in value if its age, size, style and condition are similar to other houses in the neighborhood.
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