Market value
Market value is the price a property can be traded for in a free and open market between independent and well-informed parties. The term is the core definition in all professional valuation and forms the basis for surveys, valuations, accounting and the banks' loan-to-value assessment.
The definition follows the International Valuation Standards (IVS) and is reproduced almost word for word in the accounting standard IFRS 13 (fair value) and in Finanstilsynet's guidelines for the mortgage lending regulation. Three conditions must be met: the parties must be independent (no intra-group transfers, no forced sales), they must have sufficient knowledge of the property and the market, and there must be a reasonable marketing period. If one of these is broken, we are talking about a value other than market value: a sale price under duress, an internal transfer at book value, or a negotiated price between related parties.
Market value is not the same as wealth value (formuesverdi, the tax value of assets) or tax assessment value (ligningsverdi). The Norwegian Tax Administration's wealth value is a standardised calculation of UFA multiplied by a square metre rate from SSB's house price statistics and a percentage that differs for primary and secondary homes. The wealth value is usually well below the real market value, particularly for centrally located homes. A survey is a professional assessment of market value made by a certified valuer, while a valuation is the agent's equivalent estimate. Both aim at market value, but use different methods and carry different formal weight.
For commercial property, market value is typically calculated by capitalising the net rental income using the yield method: market value = NOI / yield. A change in yield of 0.25 percentage points can move the market value of an office building by several per cent, so small movements in interest rates and the risk premium have large effects. For housing and small properties, the comparative method (comparable transactions) or the cost method (replacement cost minus wear) is used more often. Banks often use e-takst, a standardised agent valuation on a set form, for refinancing and first-time loans.
Three valuation methods dominate in practice. The comparative method compares the object with known transactions of similar properties; it is used most for housing, where transaction volume is high. The income method (yield, DCF) calculates value as the present value of future cash flows; it dominates in commercial property. The cost method (replacement cost minus wear plus land value) is used for special-purpose buildings with no transaction market and as a plausibility check against the other two.
Market value is a snapshot. It changes with interest rates, supply and demand, planning rules and expectations about future development. SSB's house price index, Eiendom Norge's monthly figures and Eiendom Norge PRO for commercial property are the three sources professionals use to track changes over time. A survey older than six months is usually no longer considered a current market value.
In Placepoint you can compare matrikkel and building data with transaction history and planning provisions in the property panel, and generate price statistics for an area through demographic and price reports as a basis for assessing market value in a comparative method.
How it looks in Placepoint
In Placepoint you find this in Property panel:
From Placepoint's dictionary: Market value
More information: IVSC: International Valuation Standards, IFRS 13: Fair Value Measurement, Skatteetaten: Bolig og eiendom
English: Market value.
Frequently asked questions
What is market value?
Market value is the price a property can be sold for in an open market between independent parties with a reasonable marketing period. The term is defined in the International Valuation Standards and forms the basis for surveys and bank assessments.
What is the difference between market value and wealth value?
Wealth value is the Norwegian Tax Administration's standardised calculation used for wealth tax, and it is normally well below the real market value. Market value is what the property can actually be traded for in the market.
Who can set a market value?
Certified valuers set market value through a survey or a condition report. Estate agents provide a valuation or an e-takst. Banks usually accept both types as a basis for lending.
How long is a market value valid?
The market changes continuously. A survey older than six months is usually not considered current, and banks often require a new assessment on refinancing if the valuation is more than a year old.
How is market value calculated for commercial property?
For commercial property, the yield method is used most often: net rental income (NOI) is divided by the market's yield requirement. A small jump in yield has a large effect on the value, because the formula is a perpetuity capitalisation.