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Bubble values

• An asset/property has two values, the price you can get for it, or the net present value of its future cash flows. If somebody auctioned a €5 note on Grafton Street and an unwise person bidded it up to €20, then a surveyor would value all €5 notes as €20 notes.

Now we know the net present value of a €5 note is €5. Likewise if an unwise person paid €2m for a house with a net present value of €0.5m, then a surveyor would value all other similar houses in that housing estate at €2m.

The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.

Almost all of the Irish banks' reckless lending was done using surveyors' or auctioneers' valuations.

These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.

John Corcoran
Glenageary, Co Dublin

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