Price and value are not the same thing - November 2018
November 12, 2018 / Written by Rich Harvey
Over the years, I’ve seen plenty of buyers make a classic mistake when looking at what to pay for real estate.
The current downturn offers a great example of this error.
Property prices in many major markets have softened over the past 12 months, which means in plenty of cases, the amount you’d pay today for a home can be considerably less than it would’ve been a year ago.
In some areas, discounting has been fairly significant.
It’s the classic supply and demand equation. Fewer buyers for the same, and in some cases greater, level of housing stock is putting downward pressure on prices.
To some less experienced buyers, it appears as if there is an increase in apparent ‘bargains’ at present.
But while the price seems attractive, the value of many of these cheapies hasn’t changed.
That’s right – price and value are two very different things when it comes to property. Here’s why.
What’s the difference?
I think of price as a micro-economic measure, as opposed to value which is a property experts understanding of long-term investment worth.
Unlike price, the value of a property isn’t impacted by short or even medium-term market forces.
A property that is well-positioned, of good quality, close to sought-after amenities and lifestyle features might go down in price when the market is softening – but its real value will often stay firm.
Price is determined by the immediate supply and demand at a specific point in time. Value is something different all together.
A property’s value is impacted by a range of factors like population growth, both now and in the future, transport infrastructure, lifestyle amenities, community facilities like schools, parks and universities, and employment.
Smart property investment is about the long-term. With that in mind, the price now isn’t as important of a consideration as the future value.
Without strong fundamentals, a bargain basement purchase is unlikely to deliver future value return.
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The lure of cheap
Let’s say you are looking to get into the investment market right now. Let’s also assume you’ve got a budget of around $600,000 to make that step.
You might look at a solid inner-city suburb and find that you still don’t get a whole lot of home for that amount, despite the price drops. And when you compare that unit or townhouse to what your money gets elsewhere, it can be tempting to go cheap.
At backyard barbecues and dinner parties, I’m often asked for advice about people’s investment strategies. And more and more of late, they’re asking me about possible purchases in markets where they feel like they to get more bang for their buck.
It might be a big house in the outer suburbs. It could be a property in a holiday market. Perhaps it’s a house in a small regional town or a spot that was once a mining hot prospect.
Surely, they reason, it’s better to park that cash in a bigger or flashier property than an inner-city urban unit?
In reality, they’re making a huge mistake.
That mining town property is a lousy value proposition. Its figure might even drop further.
The big McMansion in the outer suburbs looks nice and comes with a low-price tag, but what will the situation be in the future?
And that holiday investment? A nice location isn’t always a sign of a good buy when you factor in high vacancy rates.
Choosing based solely on price fails to ask several important questions:
- What’s the area’s long-term prospects?
- What drivers will determine future value?
- What is the vacancy rate?
- What are the demographics? etc
There’s an old joke that economists know the price of everything – it’s their bread and butter, what they obsess over for every given minute of the day – but they rarely, if ever, know the value. It’s because they’re stuck in the now, rather than looking forward to determining how value might change.
There’s a risk of getting trapped in the same mindset with property.
Think of it like cars
Imagine you’re in the market for a car but you have a limited budget. You go to a car yard and there’s a big four-wheel drive for an unbelievable price. It’s tempting – especially given it’s sat next to a modest-looking sedan for double the price.
Would you buy the cheaper option simply because of its price? Would you simply thank “Sly, Weasel and Slippery Motors”, hand them a cheque and grab the keys with barely a second thought? Or would you look under the hood, consider the number of kilometers on the clock, look at the fuel efficiency of each, get a safety inspection, do some research on consumer reviews, reliability of the manufacturer and the price of replacement parts, to name a few?
I’d be willing to bet you’d choose the second option.
Property is exactly the same. A bargain doesn’t mean that by buying at a discount, you’ve made a wise long-term decision.
Remember – reliable, well-made and efficient cars are always the better bet. And when it comes time to trade it on down the track, you definitely want something that’s going to hold its value.
Bargain isn’t always a dirty word
Despite the need to think twice about a low price, there are still some very good buys of high-value property to be found at the moment.
And with sellers having to work much, much harder to get a contract, and fewer purchasers out and about to entice, there are fantastic opportunities to nab an absolute steal.
Negotiating a good purchase price, below the listing number and the home’s current and future value, is possible if you’ve got a knowledgeable, properly qualified and savvy buyer’s agent on your side. They’re the best-placed people to intimately know both current market forces and value drivers. And they’re master negotiators.
Even if markets in Sydney and Melbourne retract further, the long-term fundamentals of many pockets are solidly in place to ensure that you won’t be burnt when things improve.
The last thing you want is to buy a bargain that stays a bargain when demand lifts, supply settles and prices rebound.
In that case, it’s not a bar-gain… it’s a bar-loss.
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