Understanding and Measuring Market Value

Value Drivers (SEPP): Property prices are influenced by four main forces that often work in conjunction: * Social: Population growth, demographic trends (aging, ethnicity), and lifestyle attitudes. * Economic: Interest rates, employment levels, construction costs, and monetary supply. * Political: Planning codes, taxes, foreign investment laws, and monetary incentives like the First Home Buyers Grant. * Physical: Topography, climate, soil, proximity to transport/schools, and infrastructure (e.g., National Broadband Network).
Market Context: Property markets are classified by use: Residential (urban forms like Inner suburbs approx. $20\,km$ from CBD), Commercial (offices), Retail, Industrial, and Rural.
Future Trends: Markets are currently shifting due to climate change impacts (inundation) and seismic social trends reshaping demand.

Spencer Case 1908: Established the legal foundation for value as the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction.
Market Value (IVS 2013): Formally adopted by the Australian Property Institute (API) and RICS in 2014, assuming proper marketing and that parties act knowledgeably and without compulsion.
Other Value Types: * Investment Value: Specific value to a particular investor. * Insurance Value: Replacement/reinstatement cost including demolition and fees. * Transaction Price: The actual amount paid for a specific property. * Fair Value: Reporting standard under International Financial Reporting Standards 13.

Theory: This is the most common method for residential valuation, based on the Principle of Substitution, which posits that a property's value should not exceed the cost of acquiring an equivalent substitute.
The Adjustment Process: Because properties are heterogeneous, sold prices of comparable evidence must be adjusted to match the subject property: * If the comparable is inferior: ADD ($+$) to its sale price. * If the comparable is superior: SUBTRACT ($-$) from its sale price.
Units of Comparison: Common metrics include number of bedrooms, main floor area ( $m^2$ ), and land area. Example unit adjustments include: * Bedroom allowance: $\$25,000$ * Main floor area: $\$781/m^2$ * Land value: $\$2,122\,psm$

Highest and Best Use: Valuation must consider the use that is physically possible, legally permissible, financially feasible, and most profitable.
Capitalization Issues: * Over-capitalization: Spending on improvements beyond the local market ceiling (e.g., a luxury pool in a modest area). * Under-capitalization: Improvements fail to maximize high underlying land value (e.g., a small old shack in a prestigious suburb).
Property Clock: A conceptual cycle for prices ranging from a Slump (6 o'clock) with falling prices to a Boom (12 o'clock) with rapidly rising prices.
Market Signals: Indicators of a market peak include rising advertised stock levels, weakening auction clearance rates, and longer Time on Market (TOM).

Cost Approach: Based on the formula $V = L + (C - D)$ , where Value equals Land plus Cost of improvements minus Depreciation. Typically used for unique or new properties.
Investment Approach: Focuses on future income earning potential and risk vs. reward; generally unsuitable for owner-occupied residential property due to the lack of emotional consideration.
Discounted Cash Flow (DCF): A derivative of the income approach for investment properties.