Market value: definition, principle and valuation method

How much is your house or flat worth? You’ll no doubt be asking yourself this question when you come to sell your property or as part of an inheritance. Whether you are selling a property or valuing it for tax purposes, it is essential to carefully calculate its market value: the price at which the property can be sold on the market under normal conditions. Find out more about our definition of market value, the different valuation methods available, and the parameters brokers use to determine it.

Market value: definition in real estate

The definition of the market value of a property is simple. It is the price at which the property could be sold under normal market conditions within a 12-month period. The notion of “usual market conditions” refers to the free market, characterised by the interplay of supply and demand: this excludes transactions between members of the same family, auctions or any type of forced sale. It is also important to understand that, under this definition, the market value is necessarily limited in time: as it is influenced by market factors, it must be recalculated regularly in order to remain viable.

The market value is the result of a property valuation, which itself takes several factors into account(see below). This applies to all types of property: detached houses, blocks of flats, land, etc.

This definition of market value distinguishes it from rental value. The latter refers to the amount that a tenant would pay to occupy a property for a full year (cumulative rent excluding charges), based on the conditions set out in the lease.

Note that the definition of market value makes one thing clear: once fixed, this value is necessarily limited in time, since it is influenced by the market and its evolution.

What is the market value?

It’s important to know the definition of market value, but what purpose does it serve? To understand it, you need to bear in mind that no two buildings are alike: each built property, each plot of land, must be subject to a specific valuation that takes into account a range of factors.

Determining market value can be useful in a number of situations, the main ones being as follows:

• As part of a sale. The market value is the price at which an owner can expect to sell their house or flat under normal market conditions. It differs from the purchase price, i.e. the price that appears on the final deed of sale signed at the notary’s office, which is the result of negotiations between the seller and the buyer, as well as the interplay of supply and demand.
• To determine the amount of a mortgage. The market value is used by the banks to determine the real price of a property and thus set the amount of the mortgage. If the market value is lower than the purchase price, the mortgage will be lower and the buyer will have to provide more equity.
• To assess a person’s assets: for tax purposes, for inheritance purposes (to calculate the amount of tax due), etc.

How is the market value of a house or flat calculated?

We have seen the definition of market value and its main uses. Now, how is it calculated? Let’s take the case of a property sale and explore the different valuation methods and the factors involved.

The different valuation methods

Professionals use various methods to determine the market value of a property. Here are the most common:

• The “hedonic” method involves valuing a property on the basis of actual transaction prices in the same area. The valuer uses the average purchase price paid for comparable properties with the same characteristics (location, surface area, number of rooms, finish, etc.). Each factor is weighted according to its importance. This is the most common method, and the one that best meets the definition of market value – market trends being at the heart of this approach.
• The “real value” method is based on a basic assumption: the real value corresponds to the costs required to construct the same building today. With this method, market fluctuations are not taken into account: the valuer takes into account the structure of the building and the value of the land. This approach allows properties to be valued in the absence of comparative data (hedonic method), particularly for isolated properties and luxury goods.
• The “yield value” method corresponds to the sustainable rental value of a property: the income that can be earned from it, taking into account maintenance costs, charges and the remaining useful life. It is used to determine the value of investment property.

Factors taken into account when determining market value

Finally, let’s look at the parameters used by professionals to calculate the market value of a property. These can be divided into three categories:

• Property situation
• Land value: In some cantons, particularly near large cities, the value of the land largely determines the value of the property. It is generally higher in tax-advantaged areas.
• Property characteristics

These factors are used to determine the market value of a property, and therefore its selling price.

You now know everything there is to know about market value: what it is, why it’s useful and how it’s calculated. To make a success of your property valuation and set a selling price that is as close as possible to the reality of the Swiss market, it is advisable to work with a property broker: with their knowledge of the market, they are able to value a property as accurately as possible.