How property prices are determined

Given the economic relevance that the housing sector has shown for the country in recent years, the price factor and its behavior are elements that are under serious scrutiny due to their natural implications. A team of experts tells us how the price of a property is measured, whether it is a house or an apartment, what we should not lose sight of with respect to it, but above all, how it can be useful to us.

How much does it cost? or how much am I going to pay? are the two most basic questions that one asks oneself at the moment of any economic transaction. It is then when the price of things becomes the center of the universe. An element on which our deepest fantasies, dreams, aspirations or simply basic needs rest.

That is why it helps to know what it means: "the price of housing"; and to find out this, it is important to have at hand a brief series of data. This information serves as a framework to later warn you of price trends, according to the experts consulted.

It is really complicated to establish the price of a house or apartment.  In many cases, and housing is no exception, the price of a property is determined by intangible, subjective or not very measurable elements. Circumstances such as the location, if it is close to commercial and educational areas, if it has all the basic infrastructure services, the dimensions of the property, its age, the number of bedrooms and bathrooms it has, its construction design, the size of the lot and of course, the quality of the finishes create such a difference, as if we were comparing the value of a Penthouse located in the financial district of Mexico City, with respect to a beachfront house in Los Cabos, B.C.S. That is to say, merely technical elements.

For example, an increase in the quality of houses in the same subdivision can raise the average value reported for them, while there are other houses in the same development that remain unchanged in their prices, even though they have the same attributes. This is when the location factor determines everything; however, this has already generated an important distortion in the average price of the houses.

Another problem is the frequency of sales. As is customary, a house may only be sold once in a multitude of years; in addition to the natural tendency to sell lower priced homes versus higher value homes. Again, the results are skewed.

Because of these complexities, there are different methods for pricing a home. Here are the three most common.

There are different methods for determining the value of a property.

There are several reasons to perform an appraisal of a property, either because you need to make a rectification of the property tax, you want to sell your house or you are going to buy a house or apartment and require this procedure to obtain a mortgage loan.

An appraisal is a report on a property whose objective is to estimate the value of a property in a given context and time, analyzing its environment and physical condition. There are different types of appraisals related to the property:

1.Mortgage appraisal. Reports intended to determine the value of the property in order to apply for a mortgage loan. These appraisals must comply with the regulations established by the SHF (Sociedad Hipotecaria Federal, SNC.), the regulatory entity for credit appraisals in the country.

2. Tax or cadastral appraisal. These are appraisals that serve as support for the payment of taxes, for example:

a) Appraisals for the payment of taxes for the acquisition of real estate (ISAI).

b) Appraisals for the payment of property tax or regularization of property taxes.

c) Appraisals for the regularization of inheritances

d) Appraisals for the payment of real estate rights.

3. Commercial appraisal. Estimates the value of a property for commercial purposes to know how much you can sell or buy a property for.

4. Appraisal for rent determination. Also known as rental appraisal, it is a report of market rents with a current date or referenced to previous periods to calculate compensation for rents not received, assignment of leases or review or negotiation of rents of current leases.

5. Appraisal for insurance purposes. Determination of invested cost for calculation of an insurance policy on the property, usually excluding the value of the land.

6. Appraisal for expropriation When a property is affected by the occupation of land or the activity of a governmental entity, an appraisal is performed to determine the value of the affected property and estimating the value to be paid for it.

7. Appraisal to measure development potential. This type of appraisal is used to determine the maximum value of the land according to the type of building permitted in its land use and density.

As you can see, the appraisal is a very useful tool for a wide range of purposes. In any type of appraisal the important thing is to look for a company with a solid methodology, technical controls and high quality standards, since the value of the property estimated in the appraisal has important fiscal and commercial repercussions.

What is a price index

A price index is an index number calculated from the evolution of the price level of an economy from a given point in time and for a given period.

Various classifications of price indexes can be made. In the following, we will show two: according to their calculation and to those most used in practice.

Classification of price indexes depending on their calculation

Price indices can be classified into two main groups: simple and complex.

Simple indexes

Simple indexes are calculated as the quotient between the price in the given period and the price at the time we take as a basis. In practice, however, complex indexes are used.

Complex indexes

Complex indices use more magnitudes to make the index more realistic. They use the average of the evolution of prices (or quantities or indexes), instead of taking the value of the price at a specific time, as in simple indexes.

Complex indices, in turn, can be weighted or unweighted:

Unweighted complex indexes: the Sauerbeck index, which is an arithmetic average of the simple indexes, and the Badstree-Dûtot index, which is the aggregate average of the prices, stand out.

Complex weighted indexes: The complex weighted indexes give more value to the magnitudes that have more importance, unlike the unweighted ones that treat all of them equally. These include the Laspeyres index, the Paasche index and the Edgeworth index.

Most commonly used price indexes

The most commonly used price indexes are as follows:

Consumer Price Index (CPI): This is an indicator that expresses the evolution of prices of a basket of goods and services representative of household consumption. It is the most widely used price index of all and, on occasions, many government measures are taken on the basis of the CPI (e.g., wage

increases, pension increases, etc.).

Harmonized Index of Consumer Prices (HICP): This indicator is similar to the CPI, but is calculated from a common basket of goods and services for all Eurozone countries. This facilitates the comparison of the HICP of several countries, as they all use the same methodology.

GDP deflator: This is another way of calculating price increases (i.e. inflation), using the ratio of nominal GDP to real GDP.

Industrial Price Index (IPRI): This index measures the change in prices of industrial products, excluding construction. Industrial products include manufacturing industry, electricity, gas and water supply, and the extractive industry.

Index of prices received and paid by farmers: This index measures the evolution of prices of agricultural sector products.

Sources:

Ixca Cienfuegos, Cómo se determinan los precios de las propiedades, realestatemarket.com.mx

Tinsa (04 September 2017) ¿Qué tipos de avalúos se pueden hacer a una propiedad? tinsamexico.mx