Price vs Value – Part One

Price vs Value – Part One

This happens to be an eloquent quote I came across in cyberspace. What is the difference between these two, if there is any at all? In fact, when it comes to property, it seems that price and value are interchangeable. For example, market price (value), loan-to-value (price) ratio and so on and so forth. Therefore, one can be the other without any consequences, right?

Wrong!

Just like the quote seems to imply, there is a world of difference between price and value even when in terms of absolute figure, they are the same. But, how can a price of RM500,000 be different from a value of RM500,000?

If you look up any dictionary, the literal meaning of the two words are similar but not the same. Before I go any further, let me share a story that can help to explain it all.

The Royal Institution of Surveyors Malaysia (RISM) issued an official response to an article that appeared on Utusan Online on 22nd October 2015 entitled “Jurunilai punca hartanah mahal?”  (“Are valuers the cause of expensive properties?”) that quoted a claim that the current unaffordable property market situation is caused by blatant overvaluation on the part of professional valuers who are more concerned about making profits and can do so scot-free without any question asked or action taken against them. RISM, with more than 1,800 members from the valuation discipline under the Property Management, Valuation and Estate Agency Surveying (PMVS) division, is one of the primary bodies representing professional valuers in Malaysia. It contends that the said claim is not just inaccurate but also unjustifiable in the same manner it would be unjustifiable to claim that all doctors purposely keep their patients sick so that they can continue to make profits from them.

According to RISM, the claim made in the article repeatedly use the word “price” whereas there is a fundamental difference between the meaning of “price” and “value”. The former is more often than not based on cost plus profit that the seller wants to get as the proceeds from his/her property. This is often the method used by developers in selling properties within their projects (which constitutes a market segment referred to as the primary market). No independent valuers are used at all by developers in determining the price of their products. It is not the intention of RISM to point fingers at developers, some of who happens to be its members, but just to clarify which areas are within valuers’ control and which are not.

On the other hand, valuers determine “value” of a property at any given time, or more specifically, “market value” which is defined as an opinion of what would be the worth of the property in the open market as agreed upon by both a willing seller and a willing buyer with knowledge of the market and without any compulsion. In determining the “market value”, valuers use five methods of valuation namely, comparison, investment, residual, cost and accounts. These methods are backed by statistics and facts as well as transaction evidence obtained from the Valuation and Property Services Department (or JPPH) under the Ministry of Finance.

Being an opinion of value is not an exact science, there will be cases of difference in opinion from one valuer to another. However, the scientific part of valuation techniques will balance up the artistic nature of the same to ensure that the difference will not vary beyond a reasonable range.

Furthermore, the opinion is formed by interpreting the prevailing market dynamics and so, valuers do not dictate the market value in any way whatsoever. It is the laws of demand and supply and market forces at play that form the underlying factors in determining value. This concept is institutionalised in the definition of the “market value”.

An edited version of this article appeared in the July/August 2016 edition of Homefinder Malaysia.

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