“A cynic is a man who knows the price of everything, and the value of nothing.”
Oscar Wilde, Lady Windermere’s Fan, 1892, Act III
I know that the quote above is semantically looking at the words “price” and “value” in a deeper and wittier connotation than I will be discussing in the context of property valuation, but it does highlight the importance of precision in language. As a veteran academic, I have travelled far and wide in the UK and around the world listening to property investors, lenders and valuers and I am constantly bemused at how few people actually understand “value”.
There are three words in common parlance in the English language (and other languages) can commonly be used interchangeably. These are “price”, “value” and “worth”. Yet in the context of property (and economics), the words have distinct meanings.
- Price is the actual observable figure at which a property asset is sold in the open market. By definition, it is an historic fact and can only be observed once the sale has been made.
- (Market) Value is an estimate of price where there is no actual sale. It is a proxy. An estimate of the figure that would be paid for the property asset in the open market were the property to be sold (after marketing) on the date of the valuation.
- Worth is a not a market based figure. It is a subjective assessment of the financial benefit of that asset to a particular owner or potential purchaser at a particular moment in time..
In simple terms, an investor may look at the cash flow that a property investment generates and calculate that the property is worth “X” to them at their internal discount rate and based on their forecasts of the future. The Open Market Valuation for the same property, however, is “X-1” based on market evidence. Thus the Investor will be interested in purchasing the property; the difference being a reflection of the divergence between their forecasts and market expectations. Conversely, if an investor thinks that that a property that they own is worth less than the Market Value, then they would consider selling that asset.