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Last edited 10 Sep 2020
Market value is defined as the underlying economic value of items such as goods and services. This is as opposed to other measures of value, such as moral values, socio-economic values, environmental values, values associated with beliefs and so on.
Market value is different to 'market price' which is the price that individuals and companies are prepared to pay for goods and services in a competitive market. This price will be determined by the scarcity of the product/service which is itself determined by supply and demand. The lower the supply, the greater will be the demand and therefore the price will be higher.
Market value and market price may be equal but only under an efficient market where rational expectations prevail. Where this is not the case, a disequilibrium occurs so that the prevailing market price does not reflect the true market value. Some suggest that London’s high house prices reflect an inefficient market where people have irrational expectations; the prices asked for do not reflect the real value of houses.
Market value should also be distinguished from 'fair value' which may be agreed between two parties according to their individual beliefs. Thus, the sale price of a second-hand car may not reflect its actual market value if in the estimation of both parties a fair transaction has been achieved that fulfils both their economic and emotional needs.
However, defining value can be problematic, especially when market values and personal values are in conflict. An old broken watch may have a very low market value yet may have huge personal value to the owner.
RICS Insights, Valuation and sale price, March 2019 Edition defines market value as: ‘The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.’
The Green Book, Central Government Guidance On Appraisal And Evaluation, Published by HM Treasury in 2018, suggests that: ‘Market value or price is the price at which a commodity can be bought or sold, determined through the interaction of buyers and sellers in a market.’
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