The cost approach is based on which principle regarding property value?

The cost approach to property valuation is fundamentally based on the principle of substitution. This principle posits that a rational buyer would not pay more for a property than the cost to acquire a comparable substitute property. In essence, if a property could be constructed at a certain cost, the value of the existing property should be similar to that cost, adjusted for any depreciation that may have occurred.

When using the cost approach, appraisers estimate the current cost of constructing a replica of the subject property, then subtract accrued depreciation to arrive at a property value. This method is particularly useful for properties that are not commonly bought and sold in the market, such as special-purpose properties.

The other options, while relevant to other valuation contexts, do not directly support the foundation of the cost approach. Utility maximization pertains to how people use resources effectively; depreciation relates to the loss in value over time; and market equilibrium describes the balance of supply and demand in the market, but none of these encapsulate the fundamental understanding of value that underpins the cost approach like the principle of substitution does.