What is price? What is value?
Mal James
Buy Sell Agent
0408 107 988
mal@james.net.au
Price is what you pay. Value is what its worth
Out and about. We can all be guilty of this; death by a thousand cuts is not the way to manage a successful sales campaign in this market. Where you possibly can, you need to get pricing expectations right at the start. I think this is the third campaign for what is a classy home, but each time the same result: nothing!
Price has become the strongest branding of the PPPs for many homes in this market. For sellers, this can prevent a sale, and for buyers, this can disguise a bargain.
Price we can all see; value, sometimes, is harder to find.
As buyers we tend to underestimate value
As sellers we tend to overestimate price
This is a common value scenario at the high end.
Why? Because of where (Position) they were bought
CCGR: Compounding Capital Growth Rate (annually). These are the rates I am currently using. They change from time to time.
Why? Because of what (Property Types) were bought
Same Price paid in Brighton and Toorak but for very different property types.
Over the decade, the land appreciated in both Toorak and Brighton, but at different annual growth rates. In Toorak, all the money was in the land, but in Brighton, it was in a new townhouse. Over the decade, the building dated and lost value.
Growth comes from the 3Ps (the value), not just 1P (the price). I am always interested in area growth rates, but also always interested in land as a percentage to price ratio for overall value judgments.
Why? Because of how (Price) they were bought
How I price
- Simply, it’s land and building (PPPs middle layer) + market emotion (base layer) + specific sale dynamics (top layer).
What is this land worth (to the market), what is this building worth (to the market), and what does the market mean to this home’s deal (positive, negative, neutral)?
This gives me a baseline, and then I work up or down from there based on the circumstances of the specific sale. (the top layer or icing of the price sandwich).
How I value
- Simply it’s client wants + client risk profile + long term PPP fundamentals.
Why? Because of when they were bought
Buyers and sellers alike seem to forget that market price (P) goes up and down in the short term, and that in the long term, it’s value (PPPs) that creates the greatest wealth movements.
And the swings and roundabouts are even larger for certain property types.
For example, prices for land per sqm are more stable (with fewer fluctuations) than prices for houses needing renovation but less stable (more volatile) than prices for brand-new homes in the area in relation to the cycles within the cycles.
3Ps (position, property, price) plus 4th P - Point in time
When you buy and sell well it makes a huge difference!
Understanding the true value of your Price sandwich!
If you don’t understand the ingredients of your sandwich, then luck becomes your biggest ingredient in price. While good luck is my favourite condiment on any price sandwich, too many buyers and sellers in Spring 2024 are experiencing the sour taste of a price vinaigrette due to not really understanding each ingredient.
Why does not understanding the market price and PPP fundamentals of your home affect you?
- Stress, because unless you are lucky, your desired trajectory does not happen.
- If you are selling, you ask the wrong price to attract buyers – wrong either way.
- If you are buying, you are opening the gap between you and your peers in terms of long term wealth.
I buy on value (3Ps)
I sell on price (1P)
Consider the price you pay or are paid for a home as a sandwich:
Understanding this ‘price sandwich’ helps clarify that when things are down you get mostly zero from the market and therefore your upside depends on the quality of the transaction’s execution and what you are buying or selling.
Bottom Layer (Market Conditions): For buyers, it’s the foundation—like a soft, spongy sourdough, plenty of stock and opportunity. Currently, for sellers, it might be less appealing, akin to stale supermarket white bread with more goodness in the wrapper than the contents. It can present as a premium from -10% to +10% of your price. On $5,000,000 that’s a range of $1,000,000.
Middle Filling (Property Features): This is the core of your property’s value, the PPP’s (position, property, price) and is approximately 80% of your price (give or take). On $10 million your home is at least $8 million on its fundamentals.
Top Layer (Transaction Factors): Comprising, amongst other things, the agent’s expertise, sales, and pricing strategies, and the element of luck—all similar to the icing on a cake, and is also about -10% to +10% on your price. $600,000 range on $3 million.
Buy and sell a $10 million home to a $5 million one or vice-versa and the range between good and bad, outside the fundamentals, could be $3 million in the bank.
Capital Growth and Short Term Influences on Price
Capital Growth Myth: Most homes go up 8% a year on a rough average and double every 8 to 10 years. NO they don’t, not any more.
Using the same agent data that Domain uses, you can see the median home price in June 2019 in Toorak was $4,400,000, and in June 2024, it was $4,800,000, or 1.75% compounding. However, if you look at Toorak’s growth rate between June 2020 ($4,000,000) and June 2023 ($7,900,000), then the capital growth rate was around 25% compounding.
Growth rates are not linear as markets are cyclical. If you bought in 2021 and are trying to sell now, then your growth rate, according to the market, is likely negative—in other words, your home may be worth less than what you paid.
Almost Everyone Exaggerates Capital Growth
In Brighton, I feel the compounding capital growth rate has been around 6% for the last decade, not 8%. But here is how easily things can get distorted.
My Data – Like with Like – Houses Bought and Sold:
- Cosham St Brighton (2015-2021): $6m to $9.9m in 6 years or 9% CCGR.
- Bay St Brighton (2014-2021): $13.1m to $20m in 7 years or 6% CCGR.
- Sussex St Brighton (2010-2021): $9m to $10.5m in 11 years or 1% CCGR.
- Dudley St Brighton (2017-2024): $11.7m to $12.5m in 6.5 years or 1% CCGR.
- Kinane St Brighton (2013-2024): $4.3m to $8.5m in 11 years or 6% CCGR.
- St Ninians Brighton (2012-2024): $5m to $8m in 12 years or 4% CCGR.
- Normanby 7% and Seacombe 8% and Bay St 3%.
Average Brighton CCGR of 6% with a low of 1% and a high of 9%. All these homes were basically the same when bought and sold.
Add in just 2 homes with seemingly great growths, and 6% goes to 10% CCGR as:
- New St Brighton (2018-2024): $3m to $8.2m in 5 years or 22% CCGR.
- Grandview Grove Brighton (2019-2022): $2.4m to $6m in 3 years or 36% CCGR.
But it’s not really 10%, for Brighton, as both New and Grandview had new homes built with my $3m estimated cost. Their CCGR is a lot less than what would be recorded in stats.
Big renovations (and big reno years) affect the median stats—just as much as low inflation has, up until recently, dampened capital growth rates the other way.
Understand the value of your ingredients. As a buyer, price could now be my friend, value is my north star.
Understand your market price when you sell. As a seller, the buyer pool @ my price is now my north star.
References:
- For a Capital Growth Calculator, I use this calculator: https://www.icicidirect.com/calculators/cagr-calculator
- For all price data, I use agent data from the REIV – it’s available to all agents.
- For all market data such as Bidderman and Auction Clearance rates, I use what we randomly gather and then compile at the James Buy Sell 4 x 100 auction tests each year.
- For individual home data, I use:
James Property Ratings (https://marketnews.com.au/ratings/)
and Section 32s/Contracts and Council / Government info (available to all)
- I use ChatGPT and Grammarly to check for spelling and grammar errors, but not for content or opinion.
- All opinions are my own: Mal James. Love this job!
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