How exactly are property prices determined?
When buying or selling a property, it is inevitable to wonder about the circumstances that affect its value.
Although the property market is influenced by various factors that affect demand and therefore house prices, the value of a property is closely linked to the property itself and therefore to its type and use, location, urban conditions and occupancy status.
In this regard, if any of these circumstances change, the value of the property will also change.
Type and use: If the characteristics of the property are modified, the price of an appraisal may vary. An example is the change of use from commercial premises to residential, from residential to office, etc.
Location: The location of the property is a determining factor in its value. The price per square metre varies according to the services and facilities in the surrounding area: health centres, green spaces and leisure areas, public transport, and quick access to transport links. On the other hand, at any given time, the area may become more attractive to potential buyers with the addition of new facilities and amenities, such as a school or hospital, or demand may fall with the construction of a nearby landfill site, for example.
Urban planning conditions: The legal regime of ‘out of order’ applies to constructions and buildings that are subject to urban planning infringements because they were built without the mandatory licence or because they do not comply with the licence granted. If this is the case, only conservation works may be carried out, not extension or restoration works, and the building may be demolished at the owner's expense.
Any change in planning can affect the value of properties, either positively (if the property is on rural land, reclassifying the land as urban would positively affect the value of the property by allowing it to be legalised) or negatively (planning establishes the route of a new road on the property's land).
Occupancy status: Whether it is vacant, occupied by the owner, by a tenant or illegally occupied, the value changes. According to ECO regulations, a mortgage value must be sustainable over time. Therefore, one of the components taken into account in the valuation is the calculation of the risk that a property may have in terms of price variation in the coming years if the building in which it is located has problems with illegal occupation.
Other circumstances that alter the value of the property include:
Functional obsolescence: refers to the deterioration of an asset's functional capacity according to market standards. Corralas are a good example of obsolescence, a popular building model characteristic of old Madrid that is no longer in demand. Configuration, materials and style are fundamental components of functional obsolescence.
Changes in the market, in demand and supply: The potential demand for a property is another key factor influencing its valuation. In addition to interest in the property itself, other variables come into play, such as an increase in supply due to new construction in the same area.
Economic cycles: The phase of the national and local economic cycle in which the property market finds itself has a direct impact on property values. Economic crises and their repercussions affect employment, especially among young people, who make up the natural demand for new housing. However, this factor always lags behind and therefore involves a process of market adaptation both when the market is accelerating and when it is cooling down.
Variables in an official valuation
To be certain that the value of the property is accurate, all these variables must be considered and strict regulations such as the ECO 805-2003 for the calculation of the valuation. This requires technical professionals and the support of an independent valuation company approved by the Bank of Spain, such as Gesvalt.