I think the reason it is not factored in is because the neighbourhoods can take a lot longer than five years to improve. Some that were sure things never come to pass and so investors do not consider this a premium. Currently we have a large industrial development going on one side of the city about 10mi away. I am buying as many homes in the neighbourhood closest to it as possible on speculation that they will appreciate because people working there will want a short commute to work. It has been 7 years and the project is still 6mo to a year from completion.
This seems to connect with my original thoughts. If one neighborhood is in the path of progress and the other isn't, I think it makes sense to buy the one in the path of progress. The "progress" might not happen, but it doesn't seem like you have to pay for that potential. Because most people buy real estate with loans, comps sales that happened 1-6 months ago are the measuring stick. Not the new development that might happen over the next 5 years.
My in-laws bought a second home in a neighborhood with a very very large community pool. It's actually a 6-acre salt water lagoon. They bought in the Brightwater Community in North Fort Myers, FL. Based on progress of current construction, I'm guessing it will be finished in about 6 months. It will be interesting to see what happens with sales price when the salt water lagoon gets finished. I could compare sales price 6 months before pool was fished to 6 months after pool is finished and compare those numbers to other neighborhoods in close proximity that do not have access to the pool.
If the houses/locations are essentially equal and the same price, then yeah, of course you would buy the one that has more potential to increase, but that luxury of choice is pretty rare when buying a primary residence.
It's easier when buying an investment property where your search range is huge. I just did this twice last year and when my search area was a third of the country, it was a lot easier to find two nearly identical houses in similar quality locations with obviously different potential.
But your typical primary home buyer usually has a pretty narrow search range and struggles to find even one property that will work for them in their budget.
Also, comps can run up *very* quickly. I was buying investment properties last year and I wanted to buy two in a location that I saw as having massive potential (it does, and way beyond what I expected at the time).
But by the time I had closed on the first property, the comps were already too high to find anything even close to the value that I just bought. A year later the nearest comp is almost double what I paid.
Now, on the flip side, when I was looking at condos in the city in 2019, I was looking at two apartments that were nearly identical except that one was older and bigger. The newer one was in an already expensive area and the older one in an area with potential, but it cost less than half the price. They were less than a mile apart.
I obviously chose the larger, cheaper one in the almost identical location, but very similar local forces have acted on these properties and although mine has doubled in value since 2019, the other has increased by more.
To come back to the original point I made. There were other condos in the city that were about the same size and price as this one, and they were in areas with less potential, but they were areas I would never consider living.
All that to say, yes, it's an obvious concept that if faced with a choice between two equal houses to pick the one that has more potential to go up in value. But in reality, primary house hunting doesn't usually work that way.
And for investment properties, you also have to factor in rental rates, which makes it even trickier because they follow different rules and patterns.
So it's just extremely rare and unlikely that a buyer will have that kind of apples to apples situation. It's a lot trickier to factor in potential in real life buying than it seems on theory.
I now have 3 properties in high potential areas, but my friends who bought very expensive primary homes here in Toronto with no eye for potential have made much larger gains than I likely ever will on all 3 properties combined. But if course they leveraged 4 times what I did.
It's just tricky to predict property values.