When is the Value, not the Value?

replacement value and market value

It seems counterintuitive, but the value of a property is not always the value you would expect. Prompted by a recent email received from a curious property owner on the Tablelands, I think it’s a good time to look at the difference between replacement value and market value – which quite frequently are not the same thing.

Replacement value is the cost of reproducing the same property again and is what an insurer will look at (minus the value of the land)  if your home suddenly blew down or up and you had to start from scratch on that block . An important factor on replacement cost is that it’s the cost of doing it to today’s standard, at today’s cost – NOT the historical cost. A lovely 250m2 home built in 1990 might have only cost $100,000 to build then, but today that same house could be $300,000 in construction.

Market value is what the property can fetch today, compared to other similar homes also on the market, which can be an important factor. Greater or fewer comparable homes changes the level of competition and therefore the pricing. Depending on the level of competition, I have seen prices vary by 10% + in the space of a few months with no difference made to the home itself.

In a normal world, you would think A (house and other improvements) plus B (land) would equal C (market value) plus or minus a little for immediate demand - but it often doesn’t quite work that way. In a market with little demand, or a large supply of properties, market values will either stay flat or drop. In comparison, outside of rare circumstances, the cost of construction almost invariably rises. So over time, we see a divergence in the two. Some markets, particularly those heavily skewed towards lifestyle tends to be a bit more sleepy, and are really dependent on a buyer having a specific WANT, rather than a NEED. Absent that need (needing to move for work, schools, family etc.) you don’t have the big growth drivers and this divergence will be exaggerated.

On the opposite side of the coin, we look at somewhere like Sydney, where properties can sell well above replacement cost. This is due to very tight supply – there is no land to recreate it, so you have to pay a premium for THAT home in THAT location.

It can be frustrating to see an appraisal of your home come through less than it would cost to replace it, but this is a function of the market, not necessarily a failure on behalf of the agent (hopefully!).