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Over-Valued Market

There is very little in the way of really unique properties for sale at the moment, and the quantity of houses for sale has dropped considerably since last year. Interest rates are rising, and will continue to rise, and prices are falling. I do not advise buying property at all at the moment unless you can buy at a real intrinsic valuation rather than a hyped estate agent's dreams.

One thing has caught my notice, and I really do need to bring it to your attention. There is a company offering the following deals. They are in business to make a buck. No problem with that. They aren’t going round with a shotgun forcing folks to pay their prices, but I think my clients should be reminded of the maths behind house purchases.

If you have bought my book on real estate then you will know the various charts and calculations I give to show you how to buy real estate at the right price. And I am the only person in this business who tells you how to properly value a house, and the last place you go for real value is an estate agent.

There can be several prices for a house, but the main two prices are the emotional value and the intrinsic value. I always say that if there is a property you really really want, and you are prepared to pay over the odds for it, then by all means do so, but if you are concerned not to be ripped off, and you are looking for real value then you need to know how to calculate the intrinsic value.

Let me instead of bringing you a list of properties for sale this week give you an insight into what is currently going on in the property markets in the UK. Whether you pay any attention to what I say is another matter, but if you are concerned to pay the right price, and not get caught out in market downturns you need to pay attention to what comes next.

Let me start by saying that house prices go up and house prices come down. Anyone who says differently is an idiot who has no grasp of the history of house prices. I am not going to rehearse here why house prices rise, and have done so at certain times. If you want to know why then buy my book, I go into great detail explaining these matters. Here I am simply concerned to go through a series of recently advertised deals and show you why they are, every single one, vastly over-priced. After all, didn't I start by giving a list of things that will disrupt high-prices for houses?

The political, social, and economic outlook is dire. Not the time to splash out on high prices.

Interest rates are rising, which means the cost of any mortgage is going higher. That is happening at the same time that inflation is heading higher, and the prospects for continued destruction of the value of the currency is guaranteed.

House values rest upon only one significant metric, their continuing cost. That is effectively the cost of the mortgage used to buy that house. If interest rates are rising, that cost is going to increase. In order to cope with the increase in the cost of the purchase money, that purchase price will have to come down.

If inflation is going to continue eating away at the cost of everything, then the purchase price of houses is going to take a hit because families will not have the cash to deal with inflationary mortgage costs as well as the weekly shopping.

With the above in mind have a look at these advertised house prices together with the financial rationale behind the invitation to buy.

How about this 2 bed flat in Torquay? I used to live in the town, so I know the area very well. Please note the estimated value leads you to believe you are buying into extra equity. There is a marketing phrase for this spoof. It’s called Buying below market value. If you believe that you’ll believe anything. There is no such thing as buying below market value. Market value is what someone is prepared to pay on the day. If you are paying over the odds that’s the market value. It certainly isn’t intrinsic value. If you buy at a commercial level, that is the market value. In other words, the deal you strike is at the market value.

Dont believe me? Go to the bank the day after you buy the place and ask for the amount you paid under the supposed market value as a loan and see what the manager has to say. He will be most amused at your naivety. And No. You wont get the money. Here are those details.

Description: 2 bed flat
Estimated rental: £650 pcm
Purchase price: £93,500
Estimated value £110,000

Let me make a few general comments before going through this.
Who estimated the value? I am doing valuations based on commercial accounting, not perceived emotional value.

Most valuations are based on what some other person thought the value of a similar property was, based on what a salesman told him. Commercial maths never came into the valuation.

Based upon simple maths, and the commercial use of money, and the underlying value of the property, it’s true value is roughly half the estimated value. Buy my book to see exactly how I calculate value, and why I use those calculations, and what happens in a market downturn if you dont pay attention to those values.
Here's the link to the book on Amazon.

Let’s try another.

Description: 3 bed house
Estimated rental: £800 pcm
Purchase price: £188,500
Estimated value £228,000

This deal is woefully over-priced. Indeed the estimated value is more than twice the intrinsic value.

Let’s try one more.

Description: 4 bed terraced house
Rental: £995 pcm
Purchase price: £140,000
Estimated value £183,000

Intrinsic value is a little over £100,000. The estimated  value is way over the top, the actual purchase price is 40% over what it should be. In the above example the “equity growth” is stated at £43,000. What the deal should say is that the purchase price is over and above the real value by that same amount; £43,000. Over the life of a mortgage just think how much more you will be paying in interest alone on that extra figure.

Be warned. Now is not the time to buy real estate. It is hugely overpriced.

If you really want to understand how the maths work you do need to read my book. I dont have the space to cope with the charts and explanations here. The book also gives you the background to how property markets work. There’s no guesswork here.

Next week I shall be discussing the metrics that are going to affect house prices in the near future. See you then

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