Real Estate Philippines 101

Do you know that a mansion erected in a slam area will lose it value? Or a parcel of land with a small hut in the midst of commercial establishments will eventually rise up in value in some future time? The answers to these can be explained by the principles of Real Estate Appraisal or Real Estate Valuation. In this article, we will briefly touch the Economic Principles of Real Estate upon which those concepts are based. As an owner of a real estate property, it will help you understand why some real estate values rise and others fall.

Definition of Terms

Value is the utility or attribute of a property to satisfy human want or command other properties in exchange. Elements of value:

• Scarcity. Limited supply of desired property increases its value.
• 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.

Cost is the combination of the factors of production to produce improvement or development. It may or may not be equal to value depending on whether costs are warranted or wisely made. Cost is historical and is a measure of things that happened in the past.

Price is an expression of an individual’s estimate of value in terms of money. It may equal, exceed or be less than the value depending on whether the buyer is fully informed, acts under duress, or buys on favorable or unfavorable financing terms.

Economic Principles of Value

1. Principle of highest and best use states that the value of a property is directly related to the use of that property; it is the reasonably probable use that produces the highest property value. The current use of a property may or may not yield its highest value.
2. Principle of substitution. In concept, every good or service has a substitute or alternative. This principle states that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution.
3. Principle of conformity. The idea that a house will more likely appreciate in value if its size, age, condition and style are similar to, or conform to, other houses in the neighborhood.
4. Principle of progression. The value of a property of lesser quality will tend to be increased by being in association with a properties of higher quality in the same area.
5. Principle of regression states that a property of higher quality in a neighborhood of properties of lower quality seeks the value level of the properties of lower quality.
6. 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” Any student of economics is aware of that. It was first written by Anne Robert Jacques Turgot. Applied to real estate, it means that as successively greater increments of land, capital, management or labor are applied to a property a greater yield is produced until a maximum is reached and there is a decline.

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