In a free market , the cost of producing goods or services has little or nothing to do with its ultimate value. The analogy is particularly true in real estate where the three things that most affect value are location, location and location. When a builder targets a home buyer he must select a location which will add value to his cost of construction in order to make a profit. The finished product must have a value higher than that for the developer to stay in business. Fortunately people are willing to pay more for a home they like, in a desirable location, than it actually costs to produce.
Income property is different.
When a commercial or investment property appraiser is asked to put a price on real estate, they must use three approaches to value in order to reach their conclusion. Replacement Cost, Market Data Approach and Income. Because of higher real estate prices and higher wages, coupled with municipal government fees and regulations, the cost of construction in urban areas is much higher than comparable buildings in suburban or rural locations. However, rents everywhere are dependent upon tenants ability to pay, which is a factor of the median household income in the location. As a result, new rental housing must be subsidized in order to be affordable to median income tenants.