Economic scenarios for the real estate market: Incorporating uncertainty and risk in real estate appraisals

Abstract

Real estate appraisal is usually regarded as both a science and an art: “science” because the appraiser uses mathematical calculations and other objective elements, “art” because he also uses his experience and other subjective elements. This dual character requires—among others—that new insights from other disciplines and current trends are taken into account. The central proposition of the article is that this requirement is not met. The author provides evidence that real estate risk management has made tremendous progress since the mid-1990s which has not found its way into appraisal practice, thereby creating a situation where appraisals by risk analysts differ greatly from appraisals by real estate appraisers. According to the author the gap between real estate appraisal and risk analysis should be closed from both sides. The article begins with an overview of the most important trends which will impact real estate values in the future. From these trends, an exemplary economic scenario for European real estate markets is derived in order to demonstrate that scenario writing is a powerful tool for risk management. After that the author discusses some other methods of risk management and their potential benefits for real estate appraisal.