The evolution of value theory and the practice of real estate valuation

The practice of real estate valuation and appraisal is an evolving discipline which is based on the fundamental linkages which exist between theoretical innovations, derived from financial asset valuation technology, and the expert judgement of the appraiser. The distinction between value theory, as developed over the last three or four centuries, and valuation theory, which is of more recent ventage, is significant. Economic value theory is concerned with the determination of the sources and foundations of value and provides a basis for many of the concepts and techniques of valuation theory. Real estate valuation theory is concerned with the derivation of methods to estimate the value of a real estate asset. The traditional sausage eater's caveat, which prescribes close scrutiny of the sausage making process, could also be applied to various real estate asset valuation procedures. The traditional three approaches to value were each developed at different points in time, in different geographical regions, based on different concepts and valuation techniques. There is no reason to expert that each method, while internally consistent individually, would produce a set of convergent value estimates. The evolution of the concept of value has been accompanied by a progressive abstraction of the physical entity used to represent or embody value. For example, technological change and the passage of time have altered the concept of money by making it more abstract and symbolic. While it remains a hybrid financial instrument which serves as a standard of value and as a medium of exchange, the physical form of money has evolved from gold, as physical money, to paper symbolic money, and more recently to pure, abstract money which exists as a set of electronic impulses displayed on a computer output device. The development of option pricing theory, while not directly applicable to non homogeneous real estate asset markets, provides a previously unexpected insight into the redistribution of value and wealth which can occur as a result of the financial management policies pursued by the owner of a levered real estate asset.