How Is “Value” Determined?

Not to get too philosophical here, but let’s have a conversation on what “value” actually is.

How is value determined?

Is it set?  Is it created?  Is it negotiated?

There’s no fixed value of real estate, and yet the fluctuations aren’t as pronounced as, say, the stock market.  But is “a property worth what somebody is willing to pay for it?”  Or is there a better measure of a property’s worth, or relative value?


When I was young and naive (aka “single”), I would launch into these diatribes about how diamonds have no real value, but rather the value is created by society via the norms, pressures, and expectations we all see and feel in day-to-day life, as well as by shrewd marketing on behalf of the diamond consortium.

I used to say, “If all the diamonds in the world were put onto the market at once, would they really have a value?”

What is a diamond anyways?  It’s a stone.  I know it’s rare, but does something that’s rare automatically have value?

Think about the ever-popular “gold standard” for a moment.  How did that come to be?  Why was it a gold-rush, and not a gravel-rush?  What if there was only as much gravel as there is gold?  Would the value be the same?

Is value wholly determined by supply and demand?

If I paid $15,000 for a diamond, I would want to know that I could turn around and sell that diamond for $15,000 to the person standing next to me.  Otherwise, it’s not worth $15,000 – it’s worth $8,000, and there’s a $7,000 “idiot premium” for adhering to societal norms and spending money frivolously as some sort of bizarre right of passage, at a time when most people can least afford to spend money on an item of this nature.

So while the cost of that diamond might be $15,000, the value is only $15,000 if I know I can sell it, within a reasonable time period, for that same amount.

Can the same be said for every product in existence?

If you bought a ski jacket from Sporting Life for $600, could you sell it to a guy in the parking lot for $600 ten minutes later?

Okay, so not every product for sale can use the words “value,” “cost,” and “worth” interchangeably.

But when it comes to a fixed asset, the “value” should be what you can get for that asset, and not what you paid for it, what you think you can get for it, or the worst: what you want to get for it.

Let’s go back to the blog post from last Friday about “One Bloor.”

I was complaining that the listing prices of some of these condos currently for sale on MLS (actually up for “assignment” and not sale, but it’s semantics for the purpose of this conversation) are absolutely outrageous when put in context of what else is available on that block, and that maybe, just maybe, the “cool factor” of the building is what is pushing these prices up.

So loop back into today’s conversation about value, and let me ask again: is that premium for living at the “sought-after, anticipated, popular, and cool” One Bloor something tangible?  Or is it created?

Is it real?

Can it be further traded on?

Maybe that’s the idea here when it comes to a lot of these condos; the “Greater Fool Theory.”

A magic rock isn’t really “worth” $100, but if you sell it to somebody for $150, then you could argue it is – and more!  And once that second person has the magic rock, having paid $150, is it “worth” $150 to them?  Is the magic rock’s “value” $150?  We logical people would argue, “no,” given it’s a goddam rock, after all.  But what if the second owner is able to find a buyer for $200?

If you know where I’m going with this, then you really, really know me.

Let’s talk about “new construction” in the downtown core, and how the prices are set.

You all know that I don’t sell pre-construction condos, and I believe that the industry is corrupt, and today’s buyer is no better off than a guppy swimming in a bowl with piranhas.

“A fool and his money are soon parted.”

“A sucker is born every day.”


But these fools are foolish not only for buying pre-construction condos, at 2015 prices, in 2011, and taking on all the risk and buying an illiquid asset, but also because when it comes time to sell the condo upon completion, the way they go about finding the unit’s “value” is a joke.

You paid $300,000 for the condo in pre-construction in 2011.

Then you paid $22,000 in closing costs to the developer upon completion, and $5,700 in land transfer tax to the government, $3,000 in legal fees, $1,000 per month in occupancy fees for 14 months while the building was being registered, and thus you’re “in” for $344,700.

So what’s your condo “worth?”

Well, what do you want it to be worth?

Today’s buyer simply says, “How much do I want to make on this?”  And then proceeds accordingly.

How about $429,900?  Sure, that sounds good!

And that is how many of today’s sellers of condos bought in pre-construction determine “value.”

And that is how value in the market, believe it or not, is often set.

Isn’t it the greatest example of the “Greater Fool Theory” you’ve ever seen?

A client sent me a listing the other day for a unit up for sale at Post House Condos – a project delayed by almost three years, but now seems to be a decent place to live.  EXCEPT……for the price.

The unit my client sent me was a small, junior-one-bedroom, priced at over $750 per square foot.  No parking, no locker.  Just the unit – at an astronomical price.

I told my client, “You could buy across the street at Vu for $550/sqft, so let’s pretend we never saw this listing, okay?”

Is there really a difference between Post House and Vu?  Post House was finished in 2015, Vu in 2011, and they’re 105 and 112 George Street respectively?

Are the stainless steel appliances any shinier in Post House?

Are the granite counters thicker?

Is there more oxygen in the air?  Maybe that’s it…

But my client wanted to know, “How come they’re looking for $750 per square foot?  What’s the logic?”


Is it logical for an intelligent person to give a developer $50,000 as a deposit for a condo being bought at 120% of current fair market value, with the promise of building a condo, subject to change, subject to other changes, subject to cancellation, and subject to changing the subject?  Maybe my sarcasm killed the point there…

So I explained to my client that the “logic” behind the $750 per square foot was that the owner had paid a massive price in pre-construction, and was now looking to get out, maybe with a profit, maybe not.

Somebody looking for $750 per square foot most likely paid $600 per square foot in pre-construction, years ago, when comparable units were trading at $500 per square foot, and the $750 per square foot represents a break-even, or a pre-determined profit.

And thus, in this wacky demonstration, we arrive at the “value” of this unit.

Because as soon as somebody comes along, and pays $750 per square foot for this unit or another one, a “value” has been established.

That’s far from intrinsic value, but so long as the “Greater Fool Theory” holds, and somebody will always come along and pay MORE than the previous person, then we’ll never find out what the unit is really “worth.”

Disclaimer: I live at Vu Condos on 112 George Street, so call me biased.  But it just so happens that this blog, based on this client’s email, was for a unit at Post House across the street from me.

So if a unit is trading at Vu for $550/sqft, how in the world can an identical unit trade at Post House for $750/sqft?

It makes absolutely no sense.

I’m not being biased here, folks.  I swear, this is my professional opinion, and perhaps this argument would carry more weight if I didn’t live in the building I was detailing in my blog.

But we’re comparing apples and apples.  The gym at Vu is no better or worse than the gym at Post House, and the concierge isn’t any nicer or meaner at either of the buildings.

So how the hell is the “value” of units at Post House $750/sqft?

Stock traders – tell me how you, theoretically, arrive at a price of a stock?  Is it the prevailing P/E ratio?  If you’re looking at an oil and gas stock, do you say, “Well most oil and gas stocks in today’s market are trading at P/E ratios of 25 – 30, so we can suggest the intrinsic value of Company XYZ is 25 – 30 times its current earnings?”

So can’t we, in real estate, look at the “value” of a square foot within two condominiums, across the street, with the same features and finishes, built within the same 5-year period, offering essentially the same standard of living, and consider those “values” to be the same, or close to it?

“Value” in real estate, as we’re seeing in the above example, or as we saw in Friday’s blog about One Bloor, is often invented, finessed, manipulated, exaggerated, or often justified and validated after being invented…..or exaggerated…..etc.

If somebody sets the price of a magic rock at $100, it’s not worth $100 until a buyer pays that price.

But when somebody sets the price of a square foot of real estate at $750, when it should be $650 or less, and somebody pays that price, and then somebody else pays that price, and then another person after that, like it or not folks, that is the value of that piece of real estate, by definition…


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  1. Rock says:

    An inengliltet answer – no BS – which makes a pleasant change

  2. michael says:

    Purchasing a home for your family is a decision that is made much more with your head than it is with your heart. As such, “value” is relative to each individual. A buyer who falls head over heels in love with a property views that property as unique and irreplaceable; he may very well be willing to pay more than any other potential buyers who are less emotionally attached and therefore value that property as more of a commodity.

    Two things stem from this:

    First, while we may be able to place a commodity value on any given property, it’s extremely difficult to predict purchase price as human nature being what it is, you can never tell if someone will just be in the right place at the right time, fall in love with the home and view it as something other than a commodity.

    Second, this is why homes with unique characteristics – however polarizing they may be are likely to sell for more than their more common, cookie cutter peers. Those unique characteristics separate a property from others in the same class and provide opportunities for buyers to fall in love with something not available elsewhere. it only takes one person to uniquely care about a specific feature or design to bring that property outside of the realm of commodities.

  3. Sergio says:

    Actually it’s to the benefit of the buyer that older generally means cheaper, unfortunately many buyers are convinced by their friends or family or some news report they saw that new is the bees knees, when they can get much more for their money otherwise. I’m sure there are plenty of people that bought new and are happy with the results, I’m not discounting that, but there is an intrinsic demand for brand new and is why the disparity of new vs used is often pretty drastic in a lot of cases. I’m sure people aren’t actively thinking “ew, someone lived here before”, but it’s ingrained in the back of our psyche. I’m of the opinion there’s logic in everything even if on the surface it may seem illogical.

  4. Rooster says:

    Rite of passage – not right of passage. But LOVE YOUR BLOG and your PICK 5!

  5. condodweller says:

    Nail chewing stock market weenies. That`s a good one! With name calling like that I`m sure people are lining up to agree with your generalization.

    “your clearly amateurish attempt at comparative market analysis”

    Nice name calling again. I think it was more than an attempt. Adjusting for square footage is so basic of a concept that I think most readers here understood it, however, let me be more specific. You take the price of the recently sold condo in phase one, you divide it by its size to arrive at a price per sqft., you multiply it by the size of the new unit in phase 2 in order to compare apples to apples as both units are two bedroom corner units, only a few floors apart. It`s the same builder, the new phase is practically a mirror image of the existing one with pretty much the same finishes and amenities. If they built both at the same time I would expect the two to have the same price. However, the price of the new unit is about $120,000 more. As David indicated above, preconstruction condos should sell at a discount. If you are an actual appraiser, I`m sure you can find a great many details I left out, although I doubt they would add up to $120,000. I believe I did make a time adjustment when I said time was the one major difference of 8-10 years. Please enlighten us on how much of a premium you place on an 8 years older, otherwise identical unit.

    Regarding your last statement, without a doubt you are wrong on both occasions.

    1. condodweller says:

      That meant to say 8 years newer unit.

  6. Appraiser says:

    @condodweller wrote:

    “Real estate buying follows the same emotional curve as buying stocks.”

    Wrong – no it does not. Stock market weenies generally chew their nails on a daily basis fretting about everything that crosses the news wires. Home buyers not so much. End of analogy.

    As for your clearly amateurish attempt at comparative market analysis, you claim to have made an adjustment for square footage (without any specifics), but neglected to make a time adjustment and left out a great many other important details.

    My guess is that you may well be a condodweller, but you are obviously a real estate bear and without doubt a renter.

  7. condodweller says:

    Real estate buying follows the same emotional curve as buying stocks. Take a look at the 14 stages of trading psychology at this link:

    I’d say we are somewhere between thrill and euphoria, probably closer to euphoria on that curve. Think about that when you sign on the dotted line next time.

    I visited a preconstruction sales centre recently of a second phase by the same developer where a unit sold for about $110/sqft higher than a recent sale of an almost identical unit in phase 1. I have adjusted for a slightly different size. That’s a $120,000 difference for the same unit except it will be about 8-10 years newer by the time it’s built. As an investment, it makes absolutely no sense to me to take that kind of a risk.

  8. Chris says:

    Here is a Ted Talk that might provide something to the conversation –

    starting at 5:25 if you don’t want to watch the whole thing – “all value is perceived value”….

    Your $750/sq. ft. condo is the “Diamond Shreddie” and the $500/sq. ft. is the square…. (around 12min mark of the video….

  9. crazyegg says:

    Hi All,

    To play devil’s advocate:

    David said –
    42,285 licensed agents with TREB.
    17,536 did 0-1 deals in the past 12 months.
    25,843 did 0-4 deals in the past 12 months.
    You have 61% of licensed Realtors netting less than a Starbucks barista, so, yes, many licensed agents are concerned about their paycheques, and not about their clients.

    To look at it another way, I could argue that these “concerned about their paycheque” agents are actually MORE CONCERNED about their clients since they may be spending more time with them and not “influencing” them to buy quickly.

    Deep eh 😉


  10. El Mikeo says:

    Actually, P.T. Barnum’s quote was: “There’s a sucker born every *minute.*”
    Barnum was bullish on suckers – and he was right.

  11. Jim B says:

    To build on “a sucker is born every day,” how about the titles of a couple of classic W. C. Fields films:

    Never Give a Sucker an Even Break
    You Can’t Cheat an Honest Man

    Are both true?

  12. Appraiser says:

    What is Market Value in Real Estate? Here is a commonly accepted version:

    “The most probable price for which the specified property rights should sell, after a reasonable exposure time in a competitive market under all conditions for a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest and assuming that neither is under undue duress.”

    How is valued determined? Real Estate theory is well-established in this area. There are three approaches to determining value. The cost approach, the income approach and the comparative market value approach.

    The cost approach determines the land value, plus the costs of building the structure, plus entrepreneurial profit, to arrive at market value.

    The income approach determines value based on how much the property will rent for and prevailing capitalization rates.

    The comparative market value approach determines value based on what comparable properties are selling for.

    In the residential real estate market, the comparative market value approach is used most frequently.

  13. Jim B says:

    “If all the diamonds in the world were put onto the market at once, would they really have a value?”

    Excellent point, David. Perhaps the clearest illustration of this is the art market. If the Mona Lisa were to suddenly hit the market, it would obviously sell for an absolutely astronomical amount of money (making the French government/people very rich). But what if, at the same time, a half dozen other Leonardos were to also go to auction? And a handful of Rembrandts, and a dozen Picassos, and… you get the picture (no pun intended).

  14. Joel says:

    i think it’s like you said last Monday: some people like a Michael Kors purse some like a Louis Vitton. Some people wear a swatch and some a rolex. They all perform their duties in the same way, but they let the people around you know that you spent more money (or have more money to spend).

  15. Paolo says:

    I agree 100% with your last statement..

    “But when somebody sets the price of a square foot of real estate at $750, when it should be $650 or less, and somebody pays that price, and then somebody else pays that price, and then another person after that, like it or not folks, that is the value of that piece of real estate, by definition…”

    I keep on asking myself this question as to why and how this happens?
    I ask myself continuiously how this can be the case.

    1. Are people just misinformed/ignorant when it comes to evaluating a fixed asset that they rely soley on the so called “expertise” of a realtor?

    2. Is there a complete disconnection between Canadians and the “value of money”?


    I’m in awe at what is going on and I’ve been sitting on the sidelines for 2 years now and have been following your blog since pretty much your first post. I’m trying to move to Toronto and just can’t digest putting myself in a situation where I’m in a bidding war with some else domestic – non domestic…

    “Markets will always remain irrational, longer then you can remain solvent!” Keynesian

    When I see the provincial debt-to-income ratio (165%) at record highs or Mortgage Carrying costs that equate to 67% of Gross Income in Toronto – 90% in Vancouver I tend to lean towards option 2 listed above or prices that are 4 x times more then the average household income, believe it or not, people have the courage to call me crazy..

    (Please refer to RBC affordability Study for the 2nd Quarter of this year:

    A broker on BNN said that the average household income to have for Downtown Toronto is 120K a year, that’s to own a CONDO… Let’s not talk about house prices..

    You have the CMHC now looking into foreign ownership, an area that has been talked about and forgot about..

    When I read posts like this, I tend to believe it’s option 3 cause I refuse to believe that a Canadian would put him or herself in a situation like that or be foolish enough to live under those financial circumstances..

    I believe it to be foreign ownership, a market all on it’s own, these people don’t know anything about the area, the building, the builder, never been to Toronto or better couldn’t even put there finger on Toronto if you handed him/her a map.

    As a result it’s a sad situation for Canadians because it’s an unhealthy market an unfair market that’s pushing our Canadian middle class downwards instead of forwards.. If foreign ownership happens to be the cause of this. (by the way all my friends in Toronto are saying this, I could be wrong)

    Keep up the good work and thanks for helping people!

    “When 7 Million people want to jump off a cliff, the person walking in the opposite direction seems to always be the crazy one!” – My quote 🙂

    P.S. I don’t want to come off as bitter and my intentions are not to offend anyone..


    1. Kyle says:

      “I keep on asking myself this question as to why and how this happens?
      I ask myself continuiously how this can be the case.

      1. Are people just misinformed/ignorant when it comes to evaluating a fixed asset that they rely soley on the so called “expertise” of a realtor?

      2. Is there a complete disconnection between Canadians and the “value of money”?


      There is another reason which is far more plausible then the three you’ve put down. Most of a country’s wealth and high income earners are highly concentrated in their cities, so there are more than enough qualified buyers in Toronto to support the 80k-100k transactions that happen in the GTA. As in just about every other major city in the world it is very plausible that wealthy/high income earning people are buying homes, not the average, not the irrational, not foreigners and not people up to their eyeballs in debt. In fact there is plenty of data to supports that.

  16. Libertarian says:

    David quoting Garth Turner…..what’s this world coming to??? haha!!

    All kidding aside, this post hits the nail on the head about many issues. Why are people paying $750/sq ft when they can pay $550/sq ft? Because their real estate agent (the buyer agent) is recommending it. And why is the buyer agent recommending it? Because the buyer agent needs a paycheque. Why does the buyer agent need the paycheque? Because there are over 40,000 agents in the GTA competing for clients and transactions. This wasn’t brought up in the post last week about 1 Bloor, but the listing shows that the buyer agent would get 3% commission for buying the unit. As per my post that day asking about the locker, I’m not an expert on condo listings, so I might be wrong. But if I’m right, why is the selling agent sweetening the deal? Because they know someone will bite. This gets repeated over and over, which results in the market we have today where prices are increasing based on psychology and nothing else.

    1. @ Libertarian

      Some stats for you:

      42,285 licensed agents with TREB.

      17,536 did 0-1 deals in the past 12 months.

      25,843 did 0-4 deals in the past 12 months.

      You have 61% of licensed Realtors netting less than a Starbucks barista, so, yes, many licensed agents are concerned about their paycheques, and not about their clients.

      But when I post blogs about the “value” of an experienced, top-of-the-industry Realtor, some people tell me I’m wrong. Some people talk about discounts, cash-backs, bonuses, and not about the Realtor that screws his or her client by telling them to buy magic beans. But nobody wants to think they’ll be that buyer who gets screwed. Until they are that buyer.

      1. Libertarian says:

        David, not to sound like a brown noser, but I agree with you. That’s why I’ve been reading your blog for years. You tell the truth about your industry.

        I’d much rather have an agent who saves me tens of thousands of dollars on the purchase price as opposed to an agent who rebates me a thousand bucks after the deal closes.

        I’m not a real estate bull or bear, just an average joe observing the happenings in our city. The bulls and bears love to debate and cite statistics back and forth to support their view. I think that both sides are wrong. Prices are rising because there are agents who recommend paying more and more and there are clients willing to pay more because they think of it as a status symbol. Until something happens that changes one of those things, the trend will continue. Or, every buyer could hire David – that would bring down prices in an instant!

      2. Noel says:

        David, I don’t think that doing more deals necessarily translates into providing better service. There is an agent in my ‘hood who is really good at getting listings. He has double-ended only 2 of the 500 houses he’s listed in the last 10 years. Does that mean he’s a great agent? No, he’s just good at getting listings. People list with him because he’s with an established agency and probably 30-40% of the signs in the ‘hood have his name on them.

        There’s an agent around the corner from me who does only about 4 deals a year. Why does she only do 4? Because she’s raising a baby is not working on marketing herself too much. Is she great at what she does? From what I have seen and heard yes.

        I might suggest those who do fewer deals could actually be doing a better job that those churning deals constantly because the former can devote more time, energy and personal service to a deal. They just might not be good at getting clients but once they do, watch out!

        Anyway, I think equating the number of deals to how good you are at marketing a home or representing a buyer makes no sense. All means is you are good at marketing yourself, not the home. Trumpeting how many deals you are do to infer that you are good at anything but marketing yourself makes a good sound byte though.

        1. crazyegg says:

          Hi Noel,

          I missed your post earlier. I agree 100% with you.

          There is no proven correlation between the number of deals one does vs. the quality of customer service provided. Anyone making such a claim is doing so without thinking it through.

          I am a part time agent myself, I choose not to gain extra clients simply because I do not have the time nor the desire to become a full time agent.

          The data that David shows does not prove one way or another if these 61% of agents are simply part-timers (who may be there by choice) or “sad” full time agents who are earning barista earnings.

          If there is more to this data, please share it. I would love to see it!


        2. condodweller says:

          I agree that the number of deals is a direct reflection on how well an agent markets himself/herself. However, I don’t think a large number of deals and good service are mutually exclusive, though.

          If David has a team in place and has processes in place for his team to handle tasks that his team is perfectly capable of doing, such as arranging staging, photoshoots of properties, coordinating showings and getting listings up on MLS, David is only necessary for bringing in clients and perhaps closing deals if he happens to be a good negotiator. Even offers can be put together by a team member if necessary. The only time the customer suffers is if David is not available to negotiate a deal because he can’t be in two or more places at the same time.

          Again, statistics is irrelevant because they can be interpreted in any way you please. It would be interesting to know how many of those 17536 agents have done 0 deals because we all know that you can earn a minimum wage on a single deal. Those with 0 deals are probably not even trying as I can’t believe that you can’t find a single friend, family, colleague, neighbour in an entire year to help with their purchase of a home. As for the ones with a single sale are probably part time agents and if you have a full-time job at say $30k a year and you increase that to $50k with a single sale you are probably pretty happy with that single sale.

          Just because you are not greedy and 4 sales are enough for you, doesn’t make you a bad agent.

    1. condodweller says:

      I thought the wedding ring was a symbol going back to cavemen when they used to tie up their women to prevent them from leaving while the men were out hunting. Now there is a symbol to be proud of ladies…

  17. Kyle says:

    There is definitely value that can be placed on factors that are somewhat intangible, provide more emotional benefit than utilitarian and that are subject to subjectivity. I think we can all agree that 10′ ceilings are worth more than 8′ ceilings, despite not adding much utility to the owner (unless the owners likes practicing their golf swing indoors). And i think the value for these things increases as our city matures and tastes become more sophisticated. Things like good design and architecture are increasingly becoming worth more. That said, the Post House and One Bloor examples provided above aren’t really examples of value, they’re simply examples of stupid people asking stupid prices. Until someone pays what they’re asking, the value of those units is no more than the ones across the street.

  18. Noel says:

    I basically agree with you. Price is set by what the market will pay and that is influenced by supply, demand, emotion and the perception of what something is worth. It’s not always rational and so the people who can see through that stand to benefit.

    1. Joe Q. says:

      You could say that “emotion” and “the perception of what something is worth” are both actually aspects of demand.

      When it comes to what a property is worth — perhaps it is not “what somebody is willing to pay for it”, but rather one dollar more than what the “next person in line” is willing to pay for it.

    2. Kyle says:

      @ Noel

      This is a great line, “It’s not always rational and so the people who can see through that stand to benefit.”

      I totally agree. There are some features that provide emotional benefit and increase real value, and then there are some features that i would put into the smoke and mirrors category, which fizzle once the glossy marketing material is gone. Being able to spot the difference is key.