Fair market value is what people will pay. That's what a market is. The problem is when markets develop on false premises (pun?), like the Soutyh Sea Bubble, the Dutch tulip craze, the dotcom mania etc.

The housing market is an unfortunate development, in that mass ownership of housing began (in the UK) in the 60s/70s at a time of high inflation. People were encouraged to over- mortgage on the grounds that inflation would soon make it affordable. This necessity for a big increase in valuation after a few years has led to a self- inflating spiral. Indeed, house-price inflation is still at the old 70s/80s rates long after general inflation has dropped to a much smaller figure.

No politician can afford to take the obvious corrective action- capital gains tax on house sales- because so many people have invested so much of their lifetime's earnings in their house. And they can always claim that periodic crashes are the impersonal market in operation, not their fault at all.