A review from a valuer’s perspective of the book Real Estate Valuation Theory – A critical appraisal by Manya M. Mooya, published by Springer 2016 .
Books on valuation theory are very few and far between, so when a book like this comes along, one will do well to take note. The subject of current valuation theory with its roots deeply embedded in neo-classical economic theory (methodological individualism, rational choice and equilibrium) is so well established that it seems as if nothing can be further added to the subject. However, Mooya in this excellent appraisal of the current valuation theory shows that in the light of recent economic uncertainty and the focus on the role of the valuation practitioner in the cause of the dilemma, it is time to re-evaluate the theoretical roots of the valuation methods as applied today. He does so by re-evaluating the current theoretical basis and putting forth an alternative theory based on a more realistic explanation of the working of the property market.
After a quick perusal of the contents page (Google Books makes the content page and chapter 1 available) it seems as if the book speaks only to the academic world where theories are debated in stuffy university lecture halls with no regard to the real world. However, as one starts to read the first chapter you are drawn into the well laid out arguments which immediately relate to personal experiences as a valuation practitioner.
Chapter 1 is an overview of the current valuation theory and Mooya quickly arrives at the problems and controversies related to the current theory, such as the nagging question of valuation inaccuracy, value “anchoring” and client influence. He touches on the use of AVM’s and the inability of the current theory to comprehend the formation of so-called housing bubbles (viz. 2008) and the prediction of its inevitable implosion. Already in this chapter he lays out the prerequisites for an alternative theory and thereby lays the foundation for the rest of the book.
Chapter 2 is an overview of the evolution of economic value theory and is basically a condensed history of the development and the understanding of the concepts of value, utility and markets from the time of Aristotle (384 – 322 BC) up to Alfred Marshall (1842 – 1924). This chapter puts into context all those “mindless” concepts one had to memorise for the exams at undergraduate level and is therefore not only useful for current students, but also for practicing professionals who have gone through the motions of memorising these concepts without ever understanding their relevance to the practice of property valuation.
Chapter 3 is a discussion of the five methods of valuation and how they are grounded in neoclassical economic theory, but also the theoretical and practical problems of each method as it relates to the actual functioning of real estate markets. Many valuers have little understanding of the underlying economic theory which shaped valuation methodology and this chapter can therefore be of great help.
Following from chapter 3, the whole of chapter 4 is given to the discussion of automated valuation models (AVM’s) and its dependence on neoclassical economic theory. This chapter in essence proves that without the “fallacy” that price equals value, the automatic valuation model will have no theoretical basis for existence.
Chapters 5 is perhaps the most “academic” chapter in the book with a chapter heading such as Real Estate Markets and Neoclassical Economic Theory: A Heterodox Critique. However, with the assistance of Google in order to understand some of the academic jargon, this chapter will prove to be most insightful in understanding why the current valuation theory is in fact less adequate to provide understanding of property values in especially thinly traded markets.
In Chapters 6 and 7 Mooya brings his arguments together to put forward an alternative theory of market value as perceived by him.
Chapter 8 concludes the book with the application of the alternative theory with respect to thin or absent real estate markets, price bubbles and crashes, a look at the 2005 – 2008 House Price Bubble, AVM’s and the question of economic forecasting of real estate markets.
After reading this book from a practicing valuer’s perspective, I had a far better understanding why, especially in thinly traded or highly heterogeneous markets, it is so difficult to conclude a single “spot” value – such a value can theoretically not exist. However, by taking cognisance of the alternative theory put forward in this book, a single “spot” value can be applied with greater confidence – not because the book proposes a new method, but because it provides a deeper understanding of the market mechanism by providing a very plausible alternative theory.
Hopefully this book will spark a renewed debate on valuation theory on the academic level which will eventually impact on valuation methods which will in turn result in more reliable valuation reports for the users of valuation services. Each valuation office should have one on their bookshelf and valuation staff should be encouraged to read it and to engage in the valuation theory debate. South Africa has fallen behind the rest of Africa in the ongoing academic conversation on topics relating to property valuation, and it is my hope that a book such as this will inspire others to join the conversation and to make South Africa a leader in the field of property valuation.
The book, the first of its kind to proceed from the African continent, is available through Amazon from around $75.00.
This review was prepared by PT Pienaar who holds a MSc. in Property Studies from the University of Cape Town as well as a higher diploma in Mechanical Engineering from the Cape Peninsula University of Technology. He is the owner of PPE Valuations (Pty) Ltd, a valuations firm which focus on the valuation of specialised property in all sectors and in the valuation of property, plant and machinery in the industrial and agri-industrial sector.