What does the 'principle of substitution' imply about property value?

The principle of substitution indicates that the value of a property is influenced by what it would cost to acquire a comparable substitute property. In essence, a buyer will not pay more for a property than the cost of obtaining an equivalent property in terms of utility, design, and location. This principle is foundational in real estate appraisal and market analysis, as it suggests that the value of a property is capped at the price of a similar property that serves the same purpose.

By understanding this principle, real estate professionals can assess market conditions more accurately. For example, if a similar property is available for sale at a lower price, it can lead to a decrease in the market value of the subject property, even if it possesses unique features. Therefore, factors such as market trends, availability of alternatives, and buyer preferences all play a significant role in determining property value according to the principle of substitution.