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LuckyOne

A Sanity Check ....

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We all know that houses are not homogenous.

That said, within some locations, it is not that hard to find two houses of similar quality and age that have sold recently.

The price of any house is really made up of two unknowns : the value of the land and the value of the building. When we have two houses of similar quality in similar areas with two known sold prices, we end up with two equations with two unknowns. Solving simultaneous equations is simple.

Taking this approach on a 1930s sea side estate on the south coast where I am doing some preliminary research, the equations yielded a value for the land in the region of GBP 780k per acre and GBP 123 per square foot for the building.

Obviously this approach is not foolproof and requires some subjective quality adjustments but I have found it to be a reasonable tool to filter out the complete chancers.

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We all know that houses are not homogenous.

That said, within some locations, it is not that hard to find two houses of similar quality and age that have sold recently.

The price of any house is really made up of two unknowns : the value of the land and the value of the building. When we have two houses of similar quality in similar areas with two known sold prices, we end up with two equations with two unknowns. Solving simultaneous equations is simple.

Taking this approach on a 1930s sea side estate on the south coast where I am doing some preliminary research, the equations yielded a value for the land in the region of GBP 780k per acre and GBP 123 per square foot for the building.

Obviously this approach is not foolproof and requires some subjective quality adjustments but I have found it to be a reasonable tool to filter out the complete chancers.

You know that it makes sense.

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Assuming that

- house prices in 1999/2000 were roughly the long-term average, and

- house prices should be related to earnings, since people buy houses with earnings

You could get a sense check on a long term average price by taking the 1999/2000 price and increasing in line with average earnings.

According to the ONS, average earnings are up about 45% since then.

Incidentally, land registry tells me that the house i rent sold in 2001 for £175k. Today my rough check values it at 175 x 1.45 = £254k. Zoopla tells me it is worth £365k.

30% fall in house prices relative to earnings needed for balance.....

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You know that it makes sense.

I think that it does. It is a relatively simple approach.

One of the problems in this country is that houses are sold based on the number of rooms and bedrooms rather than plot size and square footage.

It would be nice if the market could train EAs to think along the same lines.

It would also expose the fact that it is the land that is massively overvalued and not the buildings pretty quickly.

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Assuming that

- house prices in 1999/2000 were roughly the long-term average, and

- house prices should be related to earnings, since people buy houses with earnings

You could get a sense check on a long term average price by taking the 1999/2000 price and increasing in line with average earnings.

According to the ONS, average earnings are up about 45% since then.

Incidentally, land registry tells me that the house i rent sold in 2001 for £175k. Today my rough check values it at 175 x 1.45 = £254k. Zoopla tells me it is worth £365k.

30% fall in house prices relative to earnings needed for balance.....

The problem with Zoopla is that if the last person paid too much for it on a "value" basis, the error is carried forward.

I think that the Zillow estimates in the US are based more on the footprints of the houses and are more logical and consistent.

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The problem with Zoopla is that if the last person paid too much for it on a "value" basis, the error is carried forward.

I think that the Zillow estimates in the US are based more on the footprints of the houses and are more logical and consistent.

Your method is fine, i'm just proposing an alternative (and note that i am NOT recommending Zoopla, but rather a different approach)

Both your method and mine fail if the houses we calibrate the model with were overpaid for though.

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Can you show us your simultaneous equations?

House 1 : 0.7 acres + 3649 sq ft = 1,000,000

House 2 : 0.28 acres + 3694 sq ft = 675,000

Cost per acre = 787,000

Cost per square foot = 123

[Roughly]

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Your method is fine, i'm just proposing an alternative (and note that i am NOT recommending Zoopla, but rather a different approach)

Both your method and mine fail if the houses we calibrate the model with were overpaid for though.

You are completely right of course.

I am only trying to weed out those houses that are completely incorrectly priced on a relative basis.

The more fundamental problem is that of absolute pricing.

For the few who feel the need to buy to-day, relative pricing is a concern. For the many who will wait for "reasonable" prices, absolute pricing is much more important.

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We all know that houses are not homogenous.

That said, within some locations, it is not that hard to find two houses of similar quality and age that have sold recently.

The price of any house is really made up of two unknowns : the value of the land and the value of the building. When we have two houses of similar quality in similar areas with two known sold prices, we end up with two equations with two unknowns. Solving simultaneous equations is simple.

Taking this approach on a 1930s sea side estate on the south coast where I am doing some preliminary research, the equations yielded a value for the land in the region of GBP 780k per acre and GBP 123 per square foot for the building.

Obviously this approach is not foolproof and requires some subjective quality adjustments but I have found it to be a reasonable tool to filter out the complete chancers.

This is not a bad approach for properties where valid comparables are hard to find. I used to use ppsf every day and it gave me an important edge over agents that didn't (almost all of them).

But:

There will be a huge difference between pounds per square foot for a period property and a 1960's council house, or between good condition or bad condition. The part of town will also make a large difference, and a bungalow will be more expensive per square foot than a town house etc etc. (I see from your post that you realise this).

Thinking back to when I was valuing houses in Oxford, a nice victorian terrace in Jericho might come in at £450ppsf, whilst a tired XLA in Barton might have struggled to reach 150ppsf.

More pertinently to your post, you'll also note that the council house will be on a bigger plot - double the size or more. You'll have to find a way of discounting your land value figure. In fact, I used to treat the plot size like any of the other variables above - just make an adjustment for size, condition and aspect.

I'd say: Adjust the ppsf for style of house, area and condition. Then multiply by the square feet in the house. Then adjust that price for things like garage, garden, unique features, loft room, etc etc.

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House 1 : 0.7 acres + 3649 sq ft = 1,000,000

House 2 : 0.28 acres + 3694 sq ft = 675,000

Cost per acre = 787,000

Cost per square foot = 123

[Roughly]

With so few data points you could be getting wildly misleading numbers out.

You can test-drive your reliability by varying your data a little and looking at the effect on the result. For example, if the two prices were +-10%, how big a difference does it make to your cost-per figures? Once you've done all permutations of that, you have a range to work with.

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I know people don't own the view....but they do buy it....aspect also has to be taken into consideration as well as flood plain. ;)

Edit: Noise like a main road, industrial estates, electricity pylons in the garden etc.....or even neighbours.!

Edited by winkie

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The price of any house is really made up of two unknowns : the value of the land and the value of the building. When we have two houses of similar quality in similar areas with two known sold prices, we end up with two equations with two unknowns. Solving simultaneous equations is simple.

Taking this approach on a 1930s sea side estate on the south coast where I am doing some preliminary research, the equations yielded a value for the land in the region of GBP 780k per acre and GBP 123 per square foot for the building.

Obviously this approach is not foolproof and requires some subjective quality adjustments but I have found it to be a reasonable tool to filter out the complete chancers.

I used the following for a baseline valuation for my search area in South Cambridgeshire :

Plot value = £100/sqft of house it can support (comparable size with neighbours and not looking stupid)

Building value = £100/sqft

Then adjust for any work that needs doing.

In the last seven years, I only found three houses that met my criteria and I bought one of them at 7% under those numbers.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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