When it comes to the price of something, like real estate, there are many things to consider. In most cases prices are eventually determined by the market. The price is where the owner is willing to part with its possession and the prospective buyer is willing to buy at. Both the prospective buyer and seller determine their maximum price. Depending on bargaining power, basically the potential to find another seller or buyer, the final price will lean more to that of buyer or the seller.

In real estate the value is determined by the value of the physical property, like how it can be put to use, and then the total value of that property in its location. Locations that are highly valued by many are scarce in several ways. The location can have specific geographic characteristics that cannot be copied, like a river delta with easy access to sea. Geography can also create scarcity like valleys in a mountainous area. Amenities valuable to users of a property are not in indefinite supply, as anything has a cost. Many amenities are in a concentrated location, mostly the agglomeration of a city. So locations with certain amenities are scarce in that way. Locations can be scarce too because planning dictates so.

When the government gives fiscal kickbacks, on mortgages for example, that means that buying a house becomes more attractive relative to renting. This attraction leads to relatively more and bigger houses, and relatively higher prices. When housing and locations are scarce this balance is more towards higher prices.

The value of the physical property would in most markets tend to the building costs. The building costs are determined by the costs of material and labor, and competition in the construction industry. Regulations can determine that certain measures must be taken, which raises the cost of the physical property.

Finally, that means that the value of the plot underneath the real estate is the residual value. The residual value is the total value minus the building costs of the physical property. The residual value says something about the value of the location. This is for example used to determine the added value of adding amenities to an area, as this is expressed in the residual value of neighboring real estate.