What Exactly is a Property Really Worth

  After a 18-20% drop from their peak in Aug 2007, house prices are showing signs of stablisation. Some surveys are even reporting slight rise in prices.

Evidently some people are entering the market as it is at or near the bottom while many others still happy to continue to rent as, in their view, property is still overpriced. Who is right? Is it really good time to buy?

It is a strange dilemma: buyers nearly always think the market is about 20 per cent overvalued, while sellers think their home is 20 per cent undervalued.

The 3 reasons why any buyer contemplates a buy decision:

1. They love to and/or need to live in the property (in that area)
2. They can afford to buy, and
3. They plan to keep it for at least the next decade or so.

Last bit is important. History tells us that people who keep the property ownership for medium term walk away unscathed in any property downturn. For example those who bought in 1989 (at the height of the 1980s boom) recovered from any downturn within 6 years. Similarly those who bought in 2007 will walk away unscathed provided they keep the property, and mortgage repayments, for 6-7 years.

Those whose cash is not earning much in their savings accounts are willing to punt on property as the interest rates are historically low right now. Clearly property, already down in value, offers better opportunity cost or returns.

However there are not enough cash rich buyers to give a significant boost to the market. And they are confined to certain areas of the country. Which explains why market is showing signs of frenzy, but sady in very few select locations and not the rest.

Is the upward house price trend sustainable?
It really depends on economics: how long the recession will last, unemployment, availability of mortgage finance, repossessions, higher taxes, inflation and potential rises in interests rates etc. It also depends on global factors like oil prices etc.

Some experts are adament that there will be a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011 - as the houses are still over priced.

What exactly is the right price?
Some eminent economists have come unstuck in their belief that there is a “correct” ratio between house prices and multiples of household income.

According to Savills, the average house price is at present 6.4 times the average household income, down from 8.1 at the market peak in 2007. However the average house prices over the past 39 years have been 5 times average household income - which make the current prices still 25 - 30% over valued.

However market value frequently differs from academic notions of worth. The real value of any thing is what some one is willing, and afford to pay. Housing is part necessity, part utility, part amenity, part consumer good, part luxury good, sometimes a savings vehicle or income-producing investment and sometimes a speculative instrument.

And people will pay regardless of giving serious consideration to their income multiples or other academic analysis - as long as enough credit is available. And there is another small issue of supply and demand.

Therefore property prices will rise again - not immediately but in the medium term. And as for as buying, investors will do wel by waiting for a little while longer. Those waiting for the perfect timing, 9 months starting middle next year is the time they have been waiting for.