How does anticipation of future value affect property prices?

The economic principle of anticipation states a buyer’s perception of current value is underpinned by an assets future value. Another way of putting it is; a buyer determines what the future value is based on the benefit the property represents and uses this to conclude what present price to pay. Price is what you pay, value is what you anticipate.

People’s reliance on creating wealth correlates with anticipating future benefits, and paying a price today based on the value the asset represents in the future. This is why buyers pay premiums for specific assets in present time, they see the assets future potential more than a counter asset.

Quite simply, we’d never pay more than the price of a comparable property if we only considered the past and present benefit of something.

Take the following example. Professional sporting clubs daft players based on their future potential, but the future potential is based on current skills at junior level. So essentially, the sporting club is drafting a player based on the anticipation of future value.

The same applies when a company employs a candidate for a position. The first few months represents little value for the company, however the company’s decision is based on the anticipation of future value.

Ultimately, present value for an asset equals the future benefit which may or may not be about financial return, see owner occupiers below. The future benefits of acquiring property between investors and owner occupiers differs greatly as discussed here:

Commercial Property Investors

With commercial property, investors use science to determine a net present value of an asset by forecasting and calculating the future income benefits. This is a more methodical approach to understanding future value than residential.

Residential Property Investors

Residential property investors have many strategies but are predominantly buying in anticipation of capital growth, and cash flow to an extent. Strategic investors envisage the future benefit required for their portfolio, and may pay a premium to secure their desired asset. Other investors don’t have a plan, but believe property represents a pathway to wealth. These investors buy subjectively and therefore may also pay a premium. Ultimately, investors have a role in creating further demand depending on their anticipation of future value for an asset.

Owner Occupiers

Future benefits and value for owner occupiers are different. Owner occupiers are predominantly buying in anticipation of lifestyle. This could be a myriad of reasons including work, schools, family, etc, or the opportunity cost of renting. So the anticipation of future value isn’t as clear, however we know its lifestyle related. Because lifestyle is so important to people, it’s one of the reasons owner occupiers pay premiums for properties. Therefore, their anticipation of future value has the ability to rapidly increase demand in certain locations for certain asset classes and therefore increasing prices.

Overall, the price paid today is based on the buyer’s perception of future value, which has either a positive or negative affect on supply and demand.

Because a buyer’s anticipation of future value can be both objective and subjective, we can look at behavioural patterns in the data to uncover trends and insights to maximise results. To know more about using relevant data download our free ebook when you subscribe to my newsletter


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