What is UK property really worth? Here are three ways to find out

The-Joker

What is UK property really worth? Here are three ways to find out


http://www.moneyweek.com/investments/property/uk/house-prices-how-to-value-uk-property-23100

According to my calculations, someone buying the average house in the UK without a mortgage and renting it out would make a 2.9% after tax income return when a prudent estimate of all costs is taken into account.

Interesting.

Generali

Surely the best way is to find the price where will buyers equal willing sellers.

The problem at the moment in the UK housing market (outside the SE) is that buyers can't or won't pay what sellers want and sellers can't or won't sell for what buyers will pay.

Whether prices are too high or what buyers will pay is too little is entirely irrelevant.

The-Joker

Generali wrote: »

Surely the best way is to find the price where will buyers equal willing sellers.

The problem at the moment in the UK housing market (outside the SE) is that buyers can't or won't pay what sellers want and sellers can't or won't sell for what buyers will pay.

Whether prices are too high or what buyers will pay is too little is entirely irrelevant.

Yes that is one way to find the price, but what about the value?

Price means nothing value is everything. So many times throughout history people pay too much or too little getting the value wrong.

Generali

The-Joker wrote: »

Yes that is one way to find the price, but what about the value?

Price means nothing value is everything. So many times throughout history people pay too much or too little getting the value wrong.

It's a very good point that you make. My feeling is that value is impossible to measure and that price is the next best available measure.

The value of an owned home contains some tangible stuff (don't have to pay rent) but also a lot of intangible stuff (security of tenure, can inflict your ghastly taste on the world, don't have to pretend to like lettings agents).

The latter is hard to value except via the proxy of price.

chucknorris

The mugs always look too in depth at the initial yield, the properties I bought back in the 90's are yielding about 29% now based on the original purchase price. Property is a long term investment.

The initial yield never looks good, you have to look beyond that to see the value. There is no way I would have invested if there was no rental growth, that's what it is all about (or should be).

paddyrg

The-Joker wrote: »

Price means nothing value is everything. So many times throughout history people pay too much or too little getting the value wrong.

*cough* Facebook IPO *cough*

Zero_Sum

The-Joker wrote: »

Yes that is one way to find the price, but what about the value?

Price means nothing value is everything. So many times throughout history people pay too much or too little getting the value wrong.

surely value is only what someone is willing to pay for it

Carl31

Zero_Sum wrote: »

surely value is only what someone is willing to pay for it

whilst i agree in part with that comment, I dont think thats necessarily true

Have you ever heard of 'Goodwill'? Often used in take overs by corporations. Someone that has greater financial resources at their disposal, say a property investor, could be in a positition to offer a greater sum than a family with a saved deposit. Just because the investor can offer more, it doesnt mean the house is worth more

HAMISH_MCTAVISH

Carl31 wrote: »

Just because the investor can offer more, it doesnt mean the house is worth more

Actually, that's exactly what it means.

The value of a house or any other asset is the point at which both a seller and a buyer can agree a price and proceed with the sale.

Without both parties agreeing to the price, you have no price discovery.

And if someone, be they an investor or anyone else, is willing to pay more and is able to do so and such payment exceeds the minimum expectations of the seller, then the value of the house increases.

robmatic

The-Joker wrote: »

What is UK property really worth? Here are three ways to find out


http://www.moneyweek.com/investments/property/uk/house-prices-how-to-value-uk-property-23100

According to my calculations, someone buying the average house in the UK without a mortgage and renting it out would make a 2.9% after tax income return when a prudent estimate of all costs is taken into account.

Interesting.

It's not that interesting, because the assumptions are rubbish. Why is he comparing the average rent with the average house price? Surely to obtain the average yield you need to use the average price of rental properties, as not all properties that people purchase are bought with the intention of renting out. I would expect investors to be buying flats and small houses rather than, say, family homes.

Even with that wrong-headed assumption and the conservative estimate of costs, he still gets a return on capital after tax of 2.9% which will effectively increase with inflation and is not that dissimilar to the level of net dividends I'm receiving from my investment pot at the moment. You'll also note that he suggests that people use ISA-wrapped investments as an alternative, which isn't entirely practical for house-sized amounts of capital when the annual ISA allowance is less than £11000. So his case against property as an investment isn't that strong.

If people buy properties to live in rather than as investment then his argument completely falls apart. If we take his rental yield of 5.2% as given (even though it's based on a faulty assumption), you would need to be receiving a gross yield of 6.5% on your capital elsewhere for renting to be cost-effective. That's if you're purchasing without a mortgage. If you are mortgaged and are paying a rate of less than 5.2%, you are even more advantaged. I bought my flat in 2010 with a modest mortgage and decent-sized deposit. I'd have to have been getting 7.5% p.a. on my deposit for me to have been better off in cashflow terms by renting over the last 2 years.

Zero_Sum

Carl31 wrote: »

whilst i agree in part with that comment, I dont think thats necessarily true

Have you ever heard of 'Goodwill'? Often used in take overs by corporations. Someone that has greater financial resources at their disposal, say a property investor, could be in a positition to offer a greater sum than a family with a saved deposit. Just because the investor can offer more, it doesnt mean the house is worth more

Goodwill would only be used in property if it was one invester buying from another with a good sitting tennant. Even then the 'goodwill' would be the value of the tennant rather than the actual property.