Walulel’s guide to London’s real estate market. Part 2: Price & Worth.
Updated: Feb 22, 2019
Now that you already understand value, let’s have a look at price & worth. If you haven’t read the part 1, here is a link: walulel-s-guide-to-london-s-real-estate-market-part-1-value
Price is the actual monetary amount a piece of real estate would be exchanged for in the market. More simply, price is the sum of money needed to buy a piece of real estate or occupy it as a tenant. The price of a property should not be confused with the cost of a property. A property of value which has been deemed to have worth, will have a price that is needed to be paid in order to occupy or own it. Once paid, this price becomes the cost.
Lastly, it’s time to talk about worth. The worth of any property can then best be understood as a property’s ‘value’ for a current or future owner/occupier. Or, put another way, worth is the value that each participant in the market attributes to any property based on what is that property is or could be worth to them. For example, a home in Chelsea would be worth more to someone who works on the Kings Road, London due to its proximity, than to someone who lives out their life in Colindale.
Right now, I bet you’re thinking that worth sounds a lot like value. Well, you’re right but that’s because we’re not done explaining worth. What makes worth different from value is that worth takes into account the specific circumstances of market participants. So, for example a 1 bedroom flat in Knightsbridge with a value of £1,000,000 is unlikely to be worth that amount to a family of five of with an income of £30,000 per year. Whereas the heir to a middle eastern sultanate awash with money is likely to deem the property as being worth that. This is because the latter is likely to have more money than the former and so their perceptions of worth differ.
Let’s use an example to bring it all together. Imagine if the government announced that Hyde Park could be sold and used for whatever the purchaser wanted. To determine the value of it, everyone interested would think to themselves about what use Hyde Park could be put to. It could be used as a farm, an outdoor amphitheatre, a real estate development, etc. All these alternative uses would influence its value in the eyes of all those interested. For all the people who decided that Hyde Park’s value is worth something to them, they would form the “market” for Hyde Park. All people in the market would then put in bidding offers to buy Hyde Park based on what it is worth to them. The winning offer or bid would be the highest bid. Once accepted the winning bid would become the market value of Hyde Park. This would inform people of the likely price if someone subsequently wanted to buy Hyde Park off the new owner.
Value, worth and price are the three factors that drive the London property market. The sum of all worth(s) determines value which in turn determines the price. Heavy stuff and a lot to take in but if you made it this far you’re ready for one final revelation: Equilibrium. Equilibrium is the secret to why your house earns more than you do.
An equilibrium we will reveal on the last of these entertaining articles about real estate markets!