Real Estate Council of Alberta Fundamentals Practice Exam

What is the Principal of Regression in real estate valuation?

1. Properties of equal value are unaffected by surrounding dissimilar properties

2. Higher value properties benefit from nearby lower value properties

3. The higher valued property loses value due to surrounding lower valued properties

4. Properties within the same area appreciate uniformly regardless of differences

The correct answer is: The higher valued property loses value due to surrounding lower valued properties

The Principal of Regression in real estate valuation suggests that a higher-valued property can lose value when it is surrounded by lower-valued properties. This principle is founded on the idea that the overall desirability and market perception of a higher-end home may diminish if it is located in a neighborhood characterized by lesser-valued homes. Buyers and appraisers often take into account the surrounding area when assessing a property's value, and when there are lower-priced homes nearby, the perception of exclusivity or desirability of the higher-valued property can decrease, leading to a potential reduction in market value. This principle stands in contrast to the concept of progression, where lower-valued properties might benefit from proximity to higher-valued properties, attracting more buyers and potentially increasing their value. It's essential to understand this dynamic in real estate, as it heavily influences market trends and valuations.