Chapter 7
DATA COLLECTION AND ANALYSIS
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The identification of property interests, and other investigations that define the appraisal problem, provide direction for the collection of useful data. Appraisers need patience, judgement, and research skills to direct the preliminary steps of data collection and analysis and to gather and manage information. In real estate appraisal, the quality and quantity of information available for analysis are as important as the methods and techniques used to process the data and complete the assignment. Therefore, the ability to distinguish between different kinds of data, to research reliable data sources, and to manage information efficiently is essential to appraisal practice.
GENERAL DATA
General data include information on the social, economic, governmental, and physical forces that affect property value. This information is part of the accumulated knowledge which appraisers bring to their assignments. All general data are ultimately understood in terms of how they affect the economic climate in which real property transactions occur. In analyzing general data, appraisers observe the operation of appraisal principles by studying the interaction of the four forces that affect property values in an area. Although the four forces provide convenient categories for examining general data, it is their interaction that creates trends and ultimately influences property value.
Economic Trends
The related series of events that comprise a trend time, direction, cause and effect are studied and used as historical evidence to support forecasts. Forecasting is an art that employs scientific processes to identify or quantify future events or conditions. Forecasts are developed by analyzing statistical data, examining the perceptions and behaviour of market participants, and scrutinizing all assumptions upon which the forecast rests. The application of critical judgement is fundamental to forecasting. In making forecasts, appraisers try to discern and consider all pertinent factors affecting future conditions. Appraisers cannot predict the future, but they are able to develop probable forecasts by observing past and current market trends and examining perceptions of market participants. To forecast market conditions, appraisers scrutinize the likelihood that current trends will continue and that the events anticipated by market players will occur.
Appraisers must recognize and understand the economic trends that affect the value of real property. It is not enough to know that economic changes have occurred; the probable direction, extent, and impact of these changes must also be studied to identify and forecast trends.
The particular trends considered by an appraiser vary with the appraisal problem and the type of real estate being appraised. To estimate the market value of a shopping centre with the income approach to value, for example, the base rent and overage rent under a percentage lease must be forecast.1 The shopping centre's total potential gross income depends on trends in the number of households in the trade area, the income of these households, and their typical expenditures on the goods and services supplied by the centre; the availability of alternative shopping facilities also must be considered.
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International Economic Trends
In the world economy, the economic wellbeing of one nation may directly and indirectly affect many other nations. There is much foreign investment in Canadian real estate partly because land prices are relatively low in relation to other parts of the world and the stability of the Canadian government gives foreign investors some measure of protection. Thus, inflation and political instability in other countries influence the demand for, and value of, real estate in Canada.
The greater the intensity and duration of an economic trend, the wider its influence. Changes in basic national and international economic indicators such as the balance of foreign trade, rates of foreign exchange, commodity and natural resource price levels, wage levels, interest rates, industrial production levels, and the volume of retail sales all merit consideration.
National and Regional Economic Trends
The state of the national economy is basic to any real estate appraisal. National economic conditions are indicated by the gross national product, national income, the balance of payments to other nations, price level indexes, interest rates, aggregate employment and unemployment statistics, the number of housing starts and building permits issued, the dollar volume of construction, and other general data. A time series of economic indicators, which describes and measures changes or movements over a period of time, may reveal fluctuations in a longerterm trend and help put current statistics in perspective.
Federal programs, and economic and tax policies can affect the value ofreal estate. The introduction of the Goods and Services Tax in 1991 resulted in a reduction ofthe tax burden on certain Canadian manufacturing sectors, in favour of an increased burden on most other areas of the economy, notably the service sector. The benefits of this tax policy for the manufacturing sector, however, was more than offset for some industries by the removal of protectionist tax and import restrictions arising out of the Free Trade Agreement signed in the late 1980s. In 1990, the Bank of Canada moved to a policy framework that focused on the reduction of inflation as a primary objective. This reduction in inflation, combined with a recession induced in part by the effect of the Free Trade Agreement, led to sharply reduced interest rates in 1991 and 1992. The availability of much more affordable mortgage financing stimulated the residential real estate marketplace. Following on the heels of this increased demand for housing, economists expect demand to grow for related household durable goods, such as major appliances. History has shown in the 1970s that stimulation of the housing industry has a significant strengthening effect on residential land and housing prices, and on the related industries affecting by increases in housing starts.
The national economy also reflects the economic condition of the various geographic regions in Canada. A region's economic health depends on the status of its economic activity. This activity, in turn, encompasses economic activities in individual areas and communities within the region's geographical boundaries. Minor disruptions in the economic growth of one community, however, may not appreciably affect the region if the regional and national economies are strong. In Canada, for example, the strength or weakness of the economy in the geographic area including and immediately surrounding Toronto has a significant effect on the prospects for the national economy.
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The extent to which an appraiser is concerned with the national or regional economy and the economy of the city or neighbourhood depends on the size and type of property being appraised. For example, a large regional shopping centre that serves a trade area of 500,000 people and an automobile assembly plant that employs 5,000 workers are more sensitive to the general state of the economy than are medicaldental office buildings or retail service operations in suburban residential areas.
Local Economic Trends
The analysis of a local economy often focuses on trends in population, employment, and income. Population change, net household formation, the diversity of the economic base of the community, the level and stability of employment, wage rates, and household or family income all indicate the economic strength of a community.
The conditions and potential of the local economy are relevant to most appraisal assignments. The value of real estate in a community is influenced by the demand for its use. The demand for various types of real estate, including vacant land, depends on the population of the market that the real estate serves, the effective purchasing power of this population, and their desire to own real estate. Demand may change for various types of real estate and between real estate and nonrealty investment sources.
Employment and economic base analysis. The population and income in a region or a community depend on the employment that constitutes the economic base of the area. The economic base is the economic activity of a community that enables it to attract income from outside its borders. The ability to attract income gives a community an advantage over other communities and makes it relatively more successful in providing products or services .2 The advantage of a community may be due to its proximity to commodity markets, the presence of natural resources, the availability of a trained work force, the climate, or a government decree that establishes the community as a provincial capital or regional government service centre. As a result of a particular competitive advantage, most of the community's work force may be engaged in specialized activities such as the production of durable goods or assembly and distribution.
The nature of employment in a community or region can affect population growth, the level and stability of income, the willingness of the population to spend disposable income, and the risk associated with investments in the area. These characteristics affect the demand for, and value of, all types of real estate. A community that has a diversified economic base with various types of employment is more attractive to investors than a singleindustry town. The stability offered by a diversified local economy can reduce the risk of a real estate investment and increase property values.
City origins and growth patterns. Appraisers recognize that growth and change in an urban community can affect neighbourhoods, districts, and other areas differently. An appraiser must be aware of the factors that contribute to urban growth patterns to analyze the neighbourhood or district where the subject property is located and to determine how the area affects the quantity, quality, and duration of the property's future income stream or the amenities that create value.
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The structure of urban land uses in a community usually reflects the origin of the settlement to some extent; this is known as the siting factor. Some Canadian cities were established at transportation centres such as seaports, river crossings, or the intersection of trade routes. Other cities were founded near power sources useful to manufacturing, and still others were located for defensive, commercial, or political reasons. As the national standard of living improved, climate and other natural advantages became siting factors responsible for the development of retirement areas, recreational resorts, and other specialized communities. From its initial site, a community grows outward in a pattern dictated by the nature and availability of developable land, the evolution of technology, and the government's ability and willingness to provide essential public serviceS.3
Communities that have a scarcity of land, such as Vancouver and Montreal, experience an increase in the density of land use. Development corridors channel new construction to usable land. New technology, building materials, and construction methods make it possible to construct highrise buildings in cities without bedrock and those subject to earth tremors.
Transportation improvements and the proliferation of automobiles have also shaped modern cities. Improved transportation allows urban settlements to grow in size to serve larger markets. At the same time, the pattern of city growth is influenced by the local transportation network. Growth usually radiates from the central business district along major transportation routes; great dispersion is created by major freeway systems. Lack of such freeways is, however, not necessarily adverse to the best interests of the community: consider Vancouver, as an example of a highly desirable community in which to work or operate a business, and where municipal policy is such that no freeways exist in the city.
Local Market Considerations
To understand how national and even international economic demographic trends influence property value, an appraiser studies how the region and community where the subject property is located may respond to these trends. The appraiser should examine the economic structure of the region and the community, the comparative advantages that each possesses, and the attitudes of local government and residents toward growth and change. For example, the increasing number of elderly households in the nation is less significant to property values in Saint John's than to values in Victoria or other retirement communities which attract more of these residents. A community with a nogrowth policy may have substantially different local demographics and economic potential than one that does not discourage growth.
Regional economics have an influence on local market conditions, but local markets do not necessarily parallel regional markets. Macroeconomic studies, which are concerned with broad areas such as cities and regions, are important to an understanding of real estate and real estate trends. These studies should not be confused with microeconomic studies, which appraisers perform to evaluate the factors influencing the market value of a particular real estate parcel. For example, regional trends may suggest an expected increase in population, but the local data available to the appraiser indicate that the particular area will not benefit from this trend. While both studies are important, local trends are more likely to influence property values directly.
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Demographics
The population and its geographic distribution are basic determinants of the need for real estate. Households must have shelter, and the production and distribution of goods and services require plants, stores, hotels, hospitals, warehouses, and offices. An appraiser should be aware of the potential for change in the aggregate population and in the demographic attributes of the population that constitutes the market for the subject property. Population growth is affected by birth rates, death rates, and migration. In turn, these determinants of aggregate population reflect the rate of household formation, the age distribution of households, the state of medical technology, the standard of living, social mores, and the regulations imposed on immigration.
Aggregate population growth is distributed among regions in response to changing economic opportunities. In the past, people migrated from the prairies and Atlantic provinces to central Canada and the Rocky Mountain provinces, and from rural areas to urban areas. During the recession of the early and mid1980s in Alberta and B.C., many people moved from these provinces to Saskatchewan, Manitoba and Ontario where the economy was stronger. Recent economic recovery in the west, accompanied by a decline in the fortunes of metropolitan Toronto and Montreal, has seen migration westward again. The migration from rural to urban areas has accelerated and declined over time due to changing economic conditions. Movement from major urban to suburban areas has been significantly restricted by suburban local governments without the will or resources to fund expensive infrastructure necessary to accommodate unfettered growth. Increasing transportation costs and time related to ever longer commutes have also reduced suburban growth pressures. As a result, the demand for housing in older, closein neighbourhoods is increasing in some cities.
Real estate improvements are provided in response to the demand generated by a population with effective purchasing power. A household, i.e., persons who occupy a group of rooms or a single room that constitutes one housing unit, imposes a basic demand for housing units. With income and a desire for property ownership, households transform their needs into effective demand. In analyzing a local housing market, a knowledge of trends in the formation of households and household characteristics is crucial. The age, size, income, and other characteristics of households must be considered to determine the demand for housing.
The demand for commercial and industrial real estate is created by a population's demand for the goods and services to be produced or distributed at these sites. An appraiser must be aware of changes in the characteristics and distribution of the population that consumes the goods and services, as well as changes in the work force that produces them. A changing population coupled with technological advances can rapidly alter the demand for the services provided by property, which can affect property value.
Government Regulations and Social Attitudes
General data include information about social attitudes and the government regulations and activities that reflect these attitudes. In response to social attitudes, the government establishes land use regulations and provides publicservices such as transportation systems and municipal utilities. Appraisers accumulate information on zoning, municipal or official community plans, environmental impacts, transportation systems, local annexation policies, and other
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