Real Estate Council of Alberta Fundamentals Practice Exam

What principle explains that external factors may influence a property's value?

1. Principal of External Factors

2. Principal of Supply and Demand

3. Principal of Substitution

4. Principal of Progression

The correct answer is: Principal of External Factors

The principle that explains how external factors can influence a property's value is often referred to as the principle of external factors. This principle highlights that a property's worth is not determined solely by its intrinsic characteristics or features but is significantly affected by the broader social, economic, and environmental context in which it exists. For instance, external factors could include the overall economic environment, neighborhood conditions, availability of amenities such as schools and parks, proximity to transportation hubs, and changes in local regulations or zoning laws. These elements can positively or negatively impact property values; for example, an increase in crime rates or a decline in local services might lower property values, while new infrastructure developments may enhance them. The other concepts listed, such as supply and demand, substitution, and progression, do have their own relevance in real estate valuation. However, they typically address more specific mechanics of valuation rather than focusing on how outside influences play a critical role. Supply and demand govern market dynamics and pricing trends, substitution relates to how similar properties can replace one another in terms of value, and progression usually pertains to the impact of surrounding properties on a subject property’s value.