The Relationship Between Demand & Market Value
David Bally B.Sc.(Hons) MRICS MISTT – Submitted: July 3, 2016
The time value of money suggests that it is better to receive money now than in the future. Therefore, when it comes to lending, financial institutions usually want to know how long a collateral property will take to sell, should the mortgagor default on the loan. As a valuer, one may ascribe to the view that perceived effective demand (D) will indicate how long a real asset will take to sell and may venture to use certain terms to describe (D) such as strong, good, fair, moderate, low and poor. More or less, the shortest marketing period to find a bonafide purchaser for a property labeled as one with ‘strong demand’ is generally accepted to be 3 months, while one with poor demand could be 1 year or more. Other than being very subjective, is it also a fallacy to categorize demand as afore-mentioned?
The market value (MV) of a property involves, in one way or the other, the analysis of the interaction of demand and supply forces which operate in our laissez faire economic environment. This is illustrated in its simplest form with the use of the Direct Comparison approach. For instance, in the valuation of a dwelling-house, prices of comparable dwelling-houses form the basis of the analysis. As price is a determinant of (D), ceteris paribus, then by inference, (D) exists for those comparable properties that were traded in the market. The time a property takes to sell is probably never considered or even established when analyzing sales. This is due to the factors that affect the sale such as the level and technique of advertising, as well as the negotiating strengths of the parties, which are unknown to the valuer.
How does one know that at a particular MV, (D) is good or poor? (D) for a good or service is ‘ the quantity per time period that a household wants at a given price, providing that want is backed by an ability and willingness to pay as well as a willingness to part with the good or service’ (CEM, 2003, paper 3447V2-0). Quantity per time period is a measure of (D) and since property is heterogeneous and knowledge in the market is imperfect, one may not be able to authoritatively confirm with supporting evidence that a property can sell within 3 months and therefore, the demand is good or strong.
For example, based on the analysis of comparables, the MV of an agricultural parcel of land at Penal Rock Road, Moruga is $25,000/acre for 15 acres. The immediate neighbourhood at Penal Rock Road is briefly described as follows: the road is asphalt-paved but in poor condition and there are no services or buildings nearby; all other parcel in the vicinity are covered with secondary overgrowth. One would be tempted to say that (D) is poor, but, (D) was an implicit factor in determining its MV as reflected by the prices achieved for comparable properties. One could argue that (D) is limited by the number of players in the agricultural property sector as compared to the number of players in another property sector, e.g. the housing market.
Suffice it to say that (D) may exist at any particular MV and with a suitable marketing strategy, the property will attract a buyer. One has to be cognizant to the fact that prudent purchasers of comparable properties would have considered, among other things, the characteristics of the property and the area when negotiating the price. Once a valuer ascribes a MV, this in itself means that the property will sell if offered on the market assuming similar market conditions are prevalent during the marketing period as at the time of the valuation.
Another example to illustrate this concept can be where a dwelling-house is valued at $4M in Gulf View, La Romaine. The target market is those prospective purchasers who fall into the upper-income group. The number of purchasers within an upper-income bracket is smaller that the number that fall into a middle-income bracket. Therefore, there fewer purchasers who would be interested in the dwelling-house at that MV. Based on this premise, should (D) be described as poor and therefore will take a protracted period to sell.
Based on the preceding, Valuers should be alerting the mortgagee that (D) exists but the time it would take to sell is affected by the employment of an effective and suitable marketing strategy.
A comment could also be structured to inform the user of the Report that (D) may be affected by certain variables at the time of the valuation such as, but not restricted to, the following:
- The level of interest rates (e.g. the effect of a plunge or rise in interest rates on mortgage loans);
- Income levels (e.g. increase in public servants’ wages as a result of pressure from Trade Unions);
- Expectations (e.g. the expected impact, if any, of the new highway extension); and
- Government policy changes (e.g. agriculture sector policies that promote local food production).
This comment could also be tailored to suit the various sectors of the property market because each sector may have different circumstances at the time of the valuation which would influence (D).
Where a valuer makes a determination that a certain characteristic of the property or of the neighbourhood can affect the sale of the subject property or the length of time it would take to sell but such cannot be quantified in monetary terms, the valuer should disclose this in the Report. For example, the proximity of a cellular tower could be such a case.
With this information the mortgagee’s risk assessment team should then be able to make an informed judgement. In my opinion, the period of time a property will take to sell is dependent on factors that vary from property to property. This time factor is not an indication of the level of effective demand.
NOTE: David Bally B.Sc.(Hons) MRICS MISTT is an Associate Director at Raymond and Pierre Limited: Chartered Valuation Surveyors, Real Estate Agents, Property Consultants. This article was prepared by David Bally in his personal capacity. The opinions expressed here are of the author’s and do not reflect the view of Raymond and Pierre Limited, The Royal Institution of Chartered Surveyors (RICS), nor the Institute of Surveyors of Trinidad & Tobago (ISTT).