Which principle states that the value of a replaceable property is set at the cost of an equally valuable substitute?

The principle that value is determined based on the cost of an equally valuable substitute is known as the principle of substitution. This principle is fundamental in real estate appraisal and economic theory, indicating that no rational buyer would pay more for a property than what it would cost to purchase a comparable substitute. Essentially, if a similar property can be obtained at a lower cost, it leads to the conclusion that the higher-priced property is overpriced.

Understanding this principle helps appraisers assess property values more accurately by considering market behavior and buyer expectations. It emphasizes the importance of comparable properties when determining the value, ensuring that appraisals reflect the true market conditions.

The other principles mentioned, while important in their own right, address different aspects of valuation. The principle of fairness refers to equitable taxation and fairness in property assessments. The principle of supply and demand deals with how the availability of properties and buyer interest can affect market prices. Lastly, the principle of highest and best use evaluates the optimal use of a property to maximize its value, which is not specifically focused on substitution. Thus, the principle of substitution is the most relevant to the question regarding setting value based on substitute properties.