There has been much talk in the press and blogs in the last couple of years that houses in the UK are ‘overpriced’. Or that in some areas they are ‘overvalued’. Some even say that they are undervalued in the more exclusive areas such as parts of London. It's as if they're saying that there is some sort 'correct price' that they should be changing hands for.
But houses are neither overvalued nor undervalued. At any one moment in time houses are correctly priced for the prevailing market forces. How many times at the start of the housing slump did we hear ‘houses are only worth what people will pay for them’? Well, that general mantra applies at every stage of the market as prices go up, go down or stay the same.
But a more accurate tenet might be ‘houses are worth the money they actually exchange ownership for’. This factors in the needs, wants and financial position of both buyer and seller. It sounds simple and obvious, but this should be the starting point for analysing of the housing market.
One thing you can bet your shirt on is that every single house-seller will want the absolute best price they can for their property. It is a myth that estate agents hold the prices up. It is the seller who instructs the estate agent, not the other way round. Also, an estate agent would rather have a seller accept a Â£200,000 offer today, rather than not get a Â£250,000 sale tomorrow. Estate agents are, after all, commission based and no sale equals zero commission. This is especially true when the level of transactions is as low as it is nowadays. The trouble is that estate agents are trapped somewhat in that they cannot ask sellers to accept lower offers ‘because the market’s collapsed’, as they might then lose the instruction. So they have to use subtlety, see the problem?
On the buying side, whether the person buying is doing so as an onward purchase or as a First Time Buyer (FTB), the lowest price possible is always sought. Not rocket science is it? But also bear in mind that the number of people wanting to buy a house is no real measure of demand as many may just be dreamers. It is the level of hard offers that is received that is a more true indication. Even then some offer-makers disappear off the radar when they can’t get a mortgage promise.
So the sellers are only constrained by what they are willing or forced to accept as an offer. The buyers are constrained by the maximum they are prepared to pay or the maximum they have available to them to purchase any given property at that time. That’s it.
Prices therefore just react to the market forces and so houses will always be correctly priced. Mortgage availability, housing supply, rental prices, number of repossessions, peoples’ economic expectations, property porn, etc just affect the relationship between the sides. All that changes is the 'sentiment' of the buyers and sellers.