If it's valued at £180k, and you get them to accept an offer of £170k, then it means the house is still worth 180, you just got a bargain.
Err no, complete fallcy.
If the best price it fetched on the open market was £170K then that's what it's worth.
It's not worth £180K just because someone says it is.

I am with Star on this.
The lender wants to have the correct LTV (loan to value). The reason why they say 90% max is because that protects the security for their loan and reduces their risk if there are house price falls.
The price must be reported corrected.

If it's all above board then fair play, but if something is being reported incorrectly to the lender then it's fraud.
If the wrong price is reported to the land registry for stamp duty purposes then that may be an issue too.

I am not sure if this is legit, but I certainly don't think you can buy a house for £170K when it's worth £180K unless the seller is in distressed circumstances.
The only time people sell their stuff for less than it's worth is if they have an issue.
Paying less than asking price is normal, but the house is still only worth what you paid, not what someone claimed they coudl get for it, but didn't. If they truly believed it was worth £180K why would they sell it to you for £170K???