Monday 22 October 2018

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.

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