THE DIFFERENCE BETWEEN PRICE AND VALUE

Price and value are two very different things.

Article originally published DECEMBER 16, 2003 –Reviewed and approved.

By Neil Jenman

First the good news for investors in today’s property market – values are not going to fall.

Now, the bad news – prices are going to plunge.

Of all the lessons to be learned from the property boom, the biggest is this – there is a difference between price and value For many people, it’s going to be a  painful lesson as they realise that the price was the amount they paid. The value was what they should have paid.

Over the past two years, buyers of many investment properties – firstly in Sydney and Melbourne and, more recently, in almost all areas – have ignored the basic principle of value.

While the real estate industry talked up prices and “proved” through its gleeful sales figures that prices were rising and that the doomsayers were all wrong – “and look, here’s another set of price rise figures to prove it” – savvy investors and experienced economists were focusing on the most important word in property – value.

Back in May, the respected international magazine, The Economist, warned that house prices in Australia could fall by 20 to 30 per cent over the next four years (note the word ‘house’ not just apartment). The reason was simple – prices were “overvalued”.

Any first-year valuation student knows the definition of value – “A willing buyer purchasing from a willing seller – neither of whom is under undue pressure – and both of whom are fully informed of the facts.”

And it’s those five words – “fully informed of the facts” – which will be the undoing of tens of thousands of property investors. They bought without being fully informed of the facts. In many cases they were deceived – deliberately. The self-interest of those getting a commission from the sale or those who pandered to the industry took precedence over prudence.

Let’s take just one of many property press releases as a classic example of what can only be incompetence or dishonesty.

Issued by Enzo Raimondo of the Real Estate Institute of Victoria (REIV) in June this year – the month after The Economist issued its warnings – the release was headed, The state of Melbourne’s apartment market – myth vs reality.

“Despite some confusion fuelled by recent reports, Melbourne’s apartment prices continue to grow,” said Raimondo. Continue to grow? Prices? Yes, indeed, falsely inflated prices being paid by misinformed buyers (of whom a staggering 92 per cent were investors).

One area of concern to unbiased commentators was the Docklands area of Melbourne. Raimondo’s spin in response went as follows, “Negative generalisations about the Docklands area are unfounded.”

Unfounded? Gross returns as low as two per cent described as unfounded? Apartments where investors paid tens of thousands above the value were unfounded?

Astonishingly, to justify the prices, Raimondo compared Sydney water view apartments with Docklands apartments, saying that the Melbourne metropolitan apartment market will “continue to reward the prudent investor”.  The most prudent thing investors could have done was ignore the advice of Enzo Raimondo.

At the same time as Raimondo was issuing his “myth vs reality” statement, the property spruiker Henry Kaye, of the now defunct National Investment Institute (NII), was telling hopeful investors that the average price of a property in London (yes, the one where Her Majesty lives) was $4 million.

According to Kaye’s loony logic, the average wage in London is similar to the average wage in Sydney and Melbourne. And this meant that similar price levels “could happen here.”

Well, it didn’t happen. And it won’t. For one reason – value.

The property spruikers were creating false prices and ignoring or concealing the true values.

How many times did Mr Raimondo – or any person from any real estate institute – urge investors to obtain an independent valuation before they bought? How many times did they warn about the pitiful yields? And what did they do in response to sensible warnings? Issued self-serving spin like weapons of mass deception.

All this talk about price rises – from Enzo Raimondo of the REIV to Henry Kaye of the NII – was at best incompetent. At worst it was dishonest. Either way, the result is the same – tens of thousands of people have been burnt badly. 

As the false prices crash back to the true values, inexperienced investors are going to learn the biggest lesson in property.

There is a difference between price and value. A huge difference.

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