Value in exchange is the amount of commodities, commonly represented by money, for which a thing can be exchanged in an open market (Law Encyclopedia, 1998). Real Estate Dictionary defined it as the “worth of property based on exchanging it for goods and services”. This implies market value or the price at which a commodity would be sold in the open market. According to Wyton (1989),
“Value in exchange measures the value of a property to the broadest possible market based on the alternative uses which can be made of the property or the profitability derived from ownership.”
From the above, it is apparent that value in exchange or market value is a measurement, in money terms, of the worth of property being exchanged. The exchange value of property, expressed in terms of the common medium of exchange (money), results in prices. The price or exchange value is an extrinsic value because it constituted an objective value as dictated by the market forces of supply and demand. Value-in-exchange or market value is the most probable selling price or the reasonable price which an asset is expected to exchange for between a willing buyer and willing seller both of whom not being under any undue pressure; having a full working knowledge and being fully aware of the various uses into which the property could be put; and that the transaction is conducted within a reasonable period of time. These, therefore, imply that value-in-exchange is market driven i.e. it is determined by the forces of demand and supply and it is also an objective concept.
The exchange value of an article is a subjective concept which holds that “value is in the minds of man” or in other words that “value is to the owner”. This is responsible on one hand to the value an owner attaches to his commodity or property, which could as well be a sentimental one. The value-in-use and the value-in-exchange were first recognised by Adam Smith and as well acknowledged by David Ricardo. Adam Smith postulates that the value in exchange of a commodity depends not only on the amount of labour expended on its production but also on its scarcity.
Value being a combination of the extrinsic (i.e. external) qualities created in individuals’ minds and intrinsic (i.e. internal) qualities created in the property itself; is largely influenced by social, political, legal and economic forces within the locality. The Valuer needs detailed analyses of these forces in appraising a property for a particular purpose.
Flowing from the above, it could therefore be said that the creation of value is an economic process resulting from the interaction of supply and demand, expressed in terms of money (as a ‘price’). Value is thus determined in the property market by bids, offers of vendors and purchasers and negotiations between landlords and tenants. The Valuer notes, records and analyses the result of such transactions and attempts to apply them to the factors and circumstances of the property in respect of which he is called upon to make his valuation opinion. This scenario is so because, as a rule (although there may be exceptions), he can only carry out a valuation exercise on the basis of evidence.
Reference
Wyton, B. R. (1989). Practical application of value in use. The Canadian Appraiser/Winter, 1989.
