I EXPECT that the vast majority of those reading this article are more interested in learning that their house is indeed worth more than their neighbour’s, rather than whether or not it is actually better than theirs.
When it comes to property it is important to distinguish between three often used, and misunderstood, concepts – price, value, and worth:
- Price is the amount at which a property is actually sold for.
- Value is the estimate of what a property could sell for in the open market, i.e. an estimate of price.
- Worth is the specific value that an individual assigns to a given property or to use the property for a particular purpose, i.e. someone who wants a two bedroom flat within 50 metres of the beach, is likely to assign a higher value to it than one who is simply looking for a two bedroom flat.
Thus, when it comes to explaining why valuers are often slightly over, or under, what a property actually transacts at, this is partly down to that theirs is an estimate of price (i.e. a value), whilst the property transacts at a specific ‘price’. In the same light, a bid outside of what would be a ‘logical’ range would probably come from, say, an operator of holiday flats as the flat has a higher value/worth to them.
What does this have to do with my house you might ask? Well, the neighbour’s house is always better than yours because of our inert nature of always comparing what we have with that of others, and always wishing we had what they have. This is colloquially known as “keeping up with the Joneses”, and basically relates to ‘conspicuous consumption’, which is lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth.
At the same time, when it comes to our own assets there appears to be what is called in behavioural economics, an “endowment effect”. In other words, people place a higher value on objects they own than on objects that they do not. In one experiment, people demanded a higher price for a coffee mug that had been given to them but put a lower price on one they did not yet own.
Putting the two together leads us to a simple explanation of our comparison of house prices. A valuer looks at any house as ‘coldly’/ impartially as possible and assigns a value to it ignoring any special buyers. After we have bought the house we tend to assign a higher value to our home than to others similar to it, even though more often than not we comment how much ‘nicer’ other houses are.
When thinking about how much your house is worth, it is important to be as impartial as possible. As for the “keeping up with the Joneses” remember that “a rich man is a middle class person living in a poor neighbourhood.”
About the author
Pavlos Loizou MRICS is the lead consultant at Leaf Research
Leaf Research carries out real estate market research and financial modelling for development projects and for properties that are used as part of a business. The company specialises in development, tourism & leisure, health & wellness, the education industry, and ‘green energy’.