Debunking Common Valuation Myths

Tue, 20 Feb 2024 14:57:44 +0200

Sometimes we need to set the record straight and inform the uninformed, or simply share a nugget of wisdom. I’ve collated some of the most common myths that are found on the internet and shared some of my own insights. I’ve done this hoping that you as a property owner may gain a better understanding of the world of property.

The value of my property can only increase!

Surprise, this is not true! Much like capital and investment markets, the property market also fluctuates as it operates in an open market. While a decline in value is less common, it does occur. Some of the reasons why the value of a property might decrease include:

Urban Decay in my experience is one of the most common causes of a decrease in property value. It is the decay and deterioration of an urban area due to neglect or age.
High-risk areas that are prone to natural disasters.
Excessive listings in an area.
A less desirable economic climate or increases in interest rates, higher taxes etc.
Deferred property maintenance which means more capital expenditure is required for repairs thus deducting from value.
A change in the neighbourhood demographic.
A change in the proximity to amenities or facilities.
Increased levels of crime.
A less desirable kerb appeal.
Functional obsolescence.

The bigger my property, the higher the value.

A larger 6-bedroom home will not necessarily achieve a higher value compared with a 3-bedroom home in the same area. The building configuration would need to fit into market expectations. Ever wonder why that large house down the road has been on the market for years?

Commercial properties are similarly affected by market expectations. A large warehouse rental might stand vacant for some time in an area where the market demand is for smaller mini-factories. What is typically seen is that tenant installation/retention comes at the expense of rental income. This directly impacts the bottom line and in turn the overall value. Reduced income equals lower value.

The value of renovations proportionately increases the value of a property.

One of the most ridiculous things I’ve seen as a Valuer is another “Professional” Valuer telling a homeowner, and in writing, that if they spend X amount on improvements, the value of the home will increase proportionately. No, it doesn’t work like that - we look at the current market trends in the area which dictate a potential value range. A discerning Valuer may include a small premium for the renovations. Have a look at our blog on Property Valuer Misconceptions.

The value of a property is the same as its Replacement Cost.

This is not true, the Replacement Cost is the amount that it would cost to rebuild or reproduce a property with the same or similar materials and specifications. This is usually the amount for which the property is insured. The value on the other hand is the amount that a property is worth on the open market. The Replacement Cost and value may differ due to various reasons such as physical depreciation, and obsolescence whether in terms of functionality or utility. In most instances, the Replacement Cost of a property is higher than its market value. This applies to both commercial and residential properties.

Commercial property value is fixed and stable.

The value of a commercial property can change over time due to various factors. Picture a retail centre and consider for a moment that the investment-grade anchor tenant won’t be renewing their lease agreement due to relocation plans. This will directly impact the risk considerations made in the valuation calculation. It is one of the reasons why commercial property values are periodically reviewed.