According to the economic principle of substitution, a property's maximum value tends to be set by what?

The economic principle of substitution states that a rational buyer will not pay more for a property than the cost of acquiring an equally desirable substitute property. This principle implies that the maximum value of a property is influenced by the least amount someone has to pay for a similar property in the market. Therefore, if a comparable property can be acquired at a lower cost, that sets a ceiling on what a buyer would reasonably pay for any given property. This helps ensure that property values remain aligned with the market conditions and prevents inflationary spikes in pricing that do not reflect the intrinsic value and desirability of the property in question.

In contrast, the other options do not accurately capture the essence of the substitution principle. The highest bid may reflect market demand but does not establish a rational baseline for value based on alternatives. Average market prices, while informative, do not account for individual circumstances or substitute options that a buyer might consider. Replacement costs are focused on the cost to recreate a property but do not necessarily reflect market realities regarding what buyers are willing to pay in practice.