Owning your own home

I think you surely end up deterring bidders who feel nervous about going that far above valuation.

Maybe, but it's pretty easy to look at equivalent properties that have sold recently nearby to get a feel for what a place is actually likely to sell at. Anyway, it's academic as you wouldn't sell to these people anyway. You are trying to attract a frenzy of people who can buy and sense there might be a bargain (there isn't.).

Your example house listed at £850k sold for £1m+, right?

(it's also a much less risky strategy to underprice than it is to be market rate or over priced)

I think as well there is some mad pre-Christmas price inflation going on.

A house on my street was bought this year, minor renovations, and has a price mark up of roughly a 1/3 of its last sold value having just been put back on the market. I cannot understand.

The recent sales on the street have made me feel much better about the feeling we paid 2% over market at the time. (which still represented a c 5% reduction from listing).

If I'm looking at the right house (on trading places?) it seems the last one on that road sold for 875k, so the pricing choice doesn't seem completely unreasonable. Someone's completely lost their head - interesting to see what the mortgage company makes of it.

if this is far-east london, walthamstow onwards, it sure seems like a big price hike, but the area is very bubble-like at the moment. Buyers might be looking at the projected price-hike, feel like it's now or never and worth the gamble. They might also be sitting on a load of deposit that needs using.
Or there is a subsanbtial re-development potential that the buyer has spotted, has the means to realise quick, for cheap, etc.

10 years ago you couldn't buy in Hackney central because the news that it was hotly tipped had travelled all the way the the Evening standard front page.