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in general are acting prudently or knowledgably.

2.7 Problem 4: Should the Definition Include a Reference to Willing Seller and Willing Buyer?

      The interpretation of the condition about willing seller can be very important – and problematic. The alternative to including this condition is to define market value explicitly as the most probable price if a property is put on the market. In such an interpretation, it is completely irrelevant whether this is a price that the current owner would be willing to sell the property for.

If the condition about willing seller is taken seriously, the following situation could occur. Assume that the maximum price anyone is willing to pay for a property is 100, and that there are several actors who are willing to pay 100. None of the current owners are, however, willing to sell at that price as they think it is too low and that prices soon will increase. There are therefore no transactions on the market. If the condition about willing seller is not included in the definition, the conclusion would be that the market value is 100. If the condition of willing seller is included in the definition, the conclusion should be that there is no market value ‐ as there is no price that buyers and sellers could agree on.

      IVSC (2019 , p. 19) makes the following clarification: ‘The willing seller is motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing, whatever that price may be’. But this means that the inclusion of the condition of a willing seller does not add anything to the definition and should therefore be deleted. However, it is important to bear in mind that there could be transactions on the market that can be called ‘forced sales’ that may not be representative when analysing comparable sales to include as basis in a market valuation. We will discuss the concept of ‘forced sales’ later in this section.

      The conclusion so far would then be that market value should be interpreted as the probable price in the hypothetical situation where the property is put on the market given the current conditions, independently of the views of the current owner. This interpretation has consequences especially for valuation for balance sheet purposes which will be returned to in Chapter 6.

      The condition of willing buyer also seems either problematic or redundant. All definitions refer to transactions on a market and it is implicit in this formulation that the probable price refers to a normal transaction where no buyer is forced to sign the contract. The conclusion would then be that Occam´s razor can be used to delete both the conditions about willing buyer and willing seller. IVSC (2019 , p. 19) makes the following clarification: ‘The buyer is … one who purchase in accordance with the realities of the current market and with current market expectations …. The assumed buyer would not pay a higher price than the market requires’. This, however, creates a number of problems: How can the valuer know ‘the realities of the current market’ and ‘the price that the market requires’? Should we not expect that there are disagreements about what these realities and expectations are, and that this would lead to disagreements about what sales to include in a comparative sales analysis? These problems would be avoided by simply deleting the condition about a willing buyer.

A market value should not be mixed up with a ‘forced sales’ value. A forced sale could end up with a lower price than what could have been expected because of limited time to expose the property on the market. Therefore, transactions classified as forced sales may not be appropriate to use as comparable sales. However, a valuer should also take the following into account when evaluating whether a transaction should be regarded as forced or not (see IVSC 2019 , p. 26):

      Sales in an inactive or falling market are not automatically ‘forced sales’ simply because a seller might hope for a better price if conditions improved. Unless the seller is compelled to sell by a deadline that prevents proper marketing, the seller will be a willing seller within the definition of Market Value

       (see IVSC 2019, paras 30.1–30.7).

2.8 Problem 5: Market Value and Turnover

There are no references to turnover in either of the definitions of market value presented in the beginning of this chapter. The most probable explanation for this is that the definitions assume that there is a considerable number of potential buyers that are willing to buy a property for roughly the same price, e.g. on an active housing market with many similar properties. In such a situation, the demand curve is almost horizontal in a rather large interval on the quantity‐axis. A consequence of this is that changes in turnover will not have a strong effect on the price. This is illustrated in Figure 2.1.

      But how realistic is really this assumption? In the commercial real estate market, possible buyers may have rather different views on the potential of a property and the future development of the market where the property is located. On the residential market, actors might differ in preferences, in their incomes and in their expectations about the future development of the market. In both cases, the reservation prices of the actors on the market might differ considerably. Differences in knowledge may also lead to differences in reservation prices. The effect of these differences in reservation prices is that there will be a downward sloping demand curve, and that the expected price – the market value ‐ will depend on the number of properties that are put on the market during a certain period of time. However, it is also important to bear in mind that the market value concept in itself is independent of the numbers of transactions in the market. If there is a small number of transactions, or maybe no transactions at all, the aim when estimating market value is still to find a hypothetical price in a transaction on market terms at the value date. (We will discuss issues connected to valuation methods that may be applied in thin markets more in detail in Chapter 3, and especially in the context of so‐called ‘actor‐based methods’.)

Figure 2.1 Price and quantity with an almost horizontal demand curve.

Haurin (2005 ) discusses changes in liquidity/turnover in the context of creating a real estate price index. The variation in turnover during the business cycle will smooth prices, as prices will not rise so much when more properties are put on the market during the boom, and not fall so much when turnover goes down during a recession. An extreme case is illustrated in Figure 2.2, where no property owner is willing to sell at a price below the current one. The supply curve is then horizontal at the current price up to the current level of turnover. A fall in demand will in such a situation lead to a fall in turnover, but the observed prices will not fall. It has been argued that this is actually what happened in Sweden when the financial crisis hit the real estate market in the fall of 2008. The current owners were financially stable and did not sell when demand fell. The market died and there were almost no transactions and no new prices were observed on the market, which created problems for valuers.

A low interest rate can make these fluctuations in turnover stronger. The low interest rate can make it easier to hold out when there is a downturn in demand as debt costs fall. A low interest rate also makes it less costly to wait and therefore the expected future prices do not have to be so much higher than the current price in order to make it rational to wait. Assume that the current market value – in the recession – is 100. If the rate of return demanded is 10%, then it is rational to wait if the price in a year is expected to be higher than 110. But if the rate of return demanded is 4%, then it is rational to wait if the price in a year is expected to be higher than 104.

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