Who sets house prices? How do you get an exact idea of a property’s value?

When planning to buy a home you will need to have a very clear idea of house prices. We expect a lot from buying a home and perhaps the most important thing is knowing you have got good value for your outlay.

You will also need to be very clear on what you can afford to spend, so you can plan forward with managing the finances.

In this article we explain who the key players are in setting house prices and how they work.

House prices can be a moving target

Remember that this is not an exact science. House prices can be a bit of a moving target and do not firm right up until the moment the deal is made. At an auction, it’s the moment when the auctioneer finally calls out SOLD! That’s the moment when market forces crystalize the price.

Media reports are constantly commenting on house prices in Melbourne. Which have been mostly moving up.

In a rising market, despite recent crackdowns on underquoting by some Real Estate Agents, some desirable suburbs (Brighton for example) still had sale price blow-outs of approximately 10% (above the Agent’s estimate) in 50% of sales, in the last half of 2017.

Many economists forecast another year of growth in house prices, but some are heralding a slowdown, which is linked to the expected introduction of creeping interest rate hikes.

Looking back, 2017 overall was a big year for house price increases, reaching 13.2% (Real Estate Industry of Victoria). Although patchy month by month, the 2017 December Quarter delivered 3.2% house price growth (according to REIV). A levelling out, with slower growth, is predicted for 2018.

Why house prices value estimates can differ

People often wonder why house prices can be assessed differently by different stakeholders, (I.E. Real Estate Agent, or Bank) and then, finally sell for a price that is even different again.

The Bank’s home valuation

With a home mortgage, the bank will have to value the home. This provides the lender with confidence the asset is secure (in value) against the borrowed amount. Because if the lender can’t make the repayments on the loan, then the bank will sell the property to salvage it’s own equity.

So it isn’t surprising that a bank’s own valuation of house prices will be on the conservative side. It can be as much as 10%, or even 20% less than current prices being achieved for similar homes.

The Real Estate Agent valuation, or selling price

A Real Estate Agent will make a house price assessment. This can sway a vendor towards a particular agent who will get the job to sell the home. The Agent promising a higher house price will often get the job. But they have to then deliver, or risk sharp criticism (word of mouth or social media) if they fail to reach their mark.

The Agent gets his figure by comparing all similar sales and house prices achieved in the area and then gives the vendor a written property report and house price estimate. This is usually presented as a range figure, I.E. between ‘$X and $XX’. The home will then be advertised at this price.

The valuation by the Council

Annual rates bills usually include a Capital Improved Value (CIV) notification, a Net Annual Valuation (NAV), and/or a Gross Rental Valuation, and a Site valuation.

The CIV is an estimate of the value of the land plus any buildings on it. The Site valuation is land only. They make their valuation of the property based on sales of comparable properties, and also from the State Valuer-General’s offices who provide bi-annual data.

Other service providers like Water and Fire authorities base their own charges on the Council figures.

The Council makes its estimate based on a so-called ‘fair price’ platform. This is to avoid being seen as gouging money from ratepayers. In a moving market, Council figures are regarded as subject to being out of date by a couple of years.

But Councils provide much sharper and more accurate valuation estimates for development projects for example, that may involve acquiring land or dwellings, or when disposing of council owned land or dwellings.

The seller’s own house price valuation

Most home sellers have their own idea of their home’s value. Often it’s a wishful figure. Given people’s natural optimism this is likely to be near the top end of realistic expectation and sometimes needs a reality check.

Occasionally a home seller will just ignore a Real Estate Agent’s valuation and insist on the figure they have deduced themselves. Possibly, the seller has a special insight about their own neighbourhood. Or it could be just mild delusion. Sometimes a home owner may have spent a lot of money on improvements to their own taste, and want to recoup the money, not understanding that potential buyers don’t see the improvements as attractive at all.

The eventual sale price

The final sale price can be anticipated to a degree. It may turn out that a buyer does agree straight away to the asking price to get a quick buy. More often, market forces in play will affect the sale price as the sale process plays out. Forces like the degree of interest. Or a big turnout on auction day. The sudden appearance of a foreign investor, or a developer determined to get the home can lift a sale price at auction. Or sudden economic turmoil like a stock market crash, or interest rate hike can lower a sale price. If the vendor wants to sell quickly this speeds up the sale too and can effect the sale price.

The market alone will govern the final sale price. It comes down to whatever a buyer is ready to pay on the day.

Buyer Marketing gives you a clear property value strategy

Buyer Marketing has clear strategies for calculating an accurate house price &/or property valuation estimate.

Buyer Marketing – Melbourne’s most experienced buyer advocates are your winning edge in property buying. We specialise in securing properties for home buyers in Melbourne. We inform you accurately about house prices and getting the right property value estimate for targeted properties before you buy.