Walulel’s guide to London’s real estate market. Part 1: Value
Updated: Jun 4, 2019
Ladies and gentlemen, I hope you’re all sitting comfortably because we’re about to tell THE story of how your house came to earn more than you do.
We start our story in London’s property real estate market (“REM”) which if we may say is one of the most vibrant in the world. Traditionalists would describe the REM as the place or a mechanism that brings together buyers and sellers to determine the price at which property is “exchanged” (just a fancy way of saying let out or sold).
Traditionalists would then go on to repeat the first tenet of classical economics: the law of supply and demand. They’d explain fluctuations in price by quoting that low supply and high demand increases prices, whereas high supply and low demand decreases prices. Consequentially if prices are too high or too low, they would blame errors in supply or demand as the cause of the problem. We wish it were that simple.
The REM is unfortunately a peculiar market. The real estate market, provides sub markets for both investors and consumers. Just to make things even more awkward both the investor market (the “Asset Market”), where investors buy and trade real estate assets and the consumer market (the “Space Market”), where consumers express preferences in relation to spaces to live and work from; also have their quirks…
As a market for investors who essentially trade of claims to future cash flows (such as the rents the real estate buildings can generate for their owners), the Asset Market differs from other assets markets such as debt and equity markets as the Asset Market relates to an asset that has a utility value. As a market for consumers, the Space Market is also unique as no two properties can share the same location and once a location is fixed that cannot change.
So, if you’ve managed to get this far you’ve done well and you now know that when people refer to the REM, they are referring in fact to two separate markets, namely the Space and Asset markets. The Space and Asset markets are driven by three factors: value, worth and price. Understanding the differences between these three bedfellows is key to understanding the housing market.
Value is best defined as the estimation of the price of a property for sale in an open marketplace would attract. The market value of a piece of real estate only becomes the price, once a transaction has taken place. Therefore, if you really think about it, the value of any real estate property can also be considered as the estimation of its “usefulness” to someone else in the market.
Stay with us here, as it’s about to get tricky. While it may sound strange, value is best thought of in non-monetary terms as it can vary from person to person. For instance, the value of owning a home in Hounslow is much greater to people who need to be near Heathrow Airport than it is to people who need to be in Hornsey every day.
Value can be better understood, by considering the buyer's intentions. Don’t worry, we’ll explain. If a piece of real estate is being purchased as a primary residence, the value may be measured in terms of the quality of life the property affords. Investors and consumers will respectively measure such property’s ability to offer “attributes” such as: quality schools; good transport connections; and recreational facilities. Investors would then go on to ascribe monetary values to said attributes so that they could weigh up how much income said property could or would produce.#
To be continued …