In these wildly inflating markets the definition and reality of market value is called into question.
If you speak to many estate agents, they will always take the line that market value is whatever price someone is willing to pay.
But what happens when this buyer decides to sell and can’t find another purchaser at anywhere near the price they paid?
This is shown in another asset class with the rather extreme example of a buyer who paid $2.9 million for the Twitter founders first tweet. They have since tried to resell this (NFT ) asset at auction and after multiple bids the price has now reached $10,000. The latter being, and probably always had been, closer to the market value.
But it is not just NFT’s, anyone who has been to an auction for furniture, art, classic cars or any investment market will know the ultimate sale price can be significantly above or even below a professional’s asking price and if the buyer then tried to sell their purchase months or even years later would they get that price again? Many buyers of Damien Hirst’s art would argue probably not and will Andy Warhols recently sold Marilyn Monroe $200m silk screen picture return to that price level again?
Equally if you buy quoted shares in even the safest blue-chip FTSE 100 brands, your supposed purchase at market value may prove profitable or, as in the case of my share purchases, a disaster in just a short space of time leaving you scratching your head as to how the market value for an established company changed so quickly .
Property can also behave in a similar way particularly for more unique assets. Many years ago we valued a house at the agreed price of £20m. The house had been on the market for over a year with no other interest. It was promptly flipped for well over £50m. There are multiple other examples where this has happened particularly in London where there can always be a special purchaser, but these prices, like Jack Dorsey’s tweet, are rarely at market value.
In the current market we actually do have multiple buyers bidding up houses to unprecedented levels; so the property market has moved away from the individual special purchaser and we now have the several buyers situation which must surely suggest market value. In my opinion it does, but unfortunately, most of the time at a price that a surveyor acting for a lender is not able to support, and there are reasons for this.
As valuers we have a problem. We are only allowed to use completed sales evidence so we can’t react to the current market so inevitably we will always lag behind an inflating market. But how did we end up at the situation of having to value property at below what we know is the current market value in a strong demand market given we have several buyers for a single asset?
The problem is the Courts generally only give valuers a 5-10% margin of error so, if the bank loses money on their loan on any subsequent re-sale in a weaker market, the valuer will be forced to compensate the lender their loss. This is the problem with market value in property, we are not afforded the luxury of art, furniture, shares or any other type of asset class. Our valuation must be within 5-10% of the perceived evidence at the time of inspection.
But this 5-10% margin is decades out of date in that residential property is no longer a stable asset as it can fluctuate significantly for multiple reasons such as taxation, Brexit, inflation, politics, pandemics, lending ratios, sentiment etc. The days of a stable residential market are long past and it fluctuates perhaps more in line with other asset classes.
The tables below show 4 different asset charts, taken from online sources, one is obviously UK house prices. Can you hazard a guess at which asset is which?
In three of these asset classes the valuers are not held to task for their assessment. In one of them the valuers are taken to court and sued if the asset doesn’t re-sell at near exactly the same level.
There are also many examples of why property can no longer be held to these slender margins.
We can look at the new build market as an example. In one block in Battersea Nine Elms buyers both national and international paid £1300/sqft for over 100 flats. Is that the market value? Some of the flats are back on the market and selling at £1000/sqft. Is that the market value? There has even been distressed sales as low at £850/sqft. Is that the market value?
Obviously the new build market does have some idiosyncrasies, but we can also take an example of fairly similar houses, all in the same street all generally built at the same time, post war, and all built at the same time for social housing. The following figures are from Land Registry Sales:
These houses will vary on layout and condition but in essence they will all be generally similar. These sold prices show a fluctuation of around 40% on what are similar ex local authority homes in the same street sold around the same time and any of which can be used in arguing market value depending on whether you are trying to support a high or low figure.
The solution, in my opinion, is to give property valuers a greater leeway to reflect properties move away from stability and towards many of the other fluctuating asset classes which are all beholden to emotionally driven supply and demand at any given time.
Valuers should be given a minimum 20% margin in the courts so we can react to the market and thus providing lenders and applicants truer reflections of market levels and our figures will not fall behind the current trends.
A FTSE, B House Prices, C Art, D Bitcoin
James Perris, Residential Director