Sarah Davidson, writing in This is Money last Saturday, drew attention to the looming issue of ‘down valuing’.
Although the housing market has bounced back into life in England following the ending of lockdown measures it is far too soon to tell how long the bounce may be sustained, or what happens in the event of a second wave of Covid infections.
Whenever there is uncertainty those who are valuing property for the purposes of mortgage loans swiftly err towards the side of caution, fearful that getting it wrong will result in being sued.
Widespread down-valuing hits sales hard and the premise that the ‘value’ of a property is the figure agreed between a willing seller and a willing buyer goes straight out of the window.
The ‘value’ is what the valuer says it is, and the current market conditions are unlikely to point them in the direction of optimism.
We can expect to see an increasing trend of agreed sales falling down at valuation.
Davidson wrote:
“For the housing market to get back up and running properly, home valuations are fundamental.
“Mortgage lenders rely on them to assess how much risk they are taking on when approving a mortgage application or remortgage request.
“Speaking anecdotally, valuers say lenders remain deeply worried at how accurate valuations can be without comparable sales prices available for a post-coronavirus housing market.
“So concerned are banks and building societies on this point that the Bank of England was prompted to issue guidance this week on how and when to value properties that underlie mortgage loans on lenders’ balance sheets.”
The Prudential Regulation Authority (PRA) at the Bank of England is responsible for the regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms.
Part of its remit is to administer Capital Requirements Regulation (CRR) which is directly applicable in all EU member states, and lays down prudential requirements for capital, liquidity and credit risk for investment firms and credit institutions
Last Friday (29 May), the PRA published a document responding to questions from firms in relation to CRR for property valuations for residential and commercial real estate exposures.
In particular, given the disruption in the property market caused by Covid-19, firms have identified difficulties in conducting physical inspections due to social distancing measures, obtaining reliable property valuations, and determining appropriate approaches to suspended or unreliable house price indices.
For real estate to continue qualifying as eligible collateral under the standardised approach (SA) and the foundation internal ratings based approach (FIRB), CRR Article 208(3)(a) requires firms to monitor the value of property on a frequent basis.
Article 208(3)(b) requires that for loans exceeding EUR 3 million or 5% of the own funds of an institution, the property valuation shall be reviewed by a valuer at least every three years.
The valuer must be someone who possesses ‘the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process’.
Article 229(1) requires that the property valuation be at or less than market value and be determined by an independent valuer.
For existing residential and commercial mortgages, firms should continue to monitor the value of properties.
Given the recent impact of Covid-19 on the property market, where it is not possible to review and update valuations as required under Articles208(3)(b) and 229(1),such as where a physical inspection is necessary but not possible or where evidential data is unavailable, firms can defer the review until the first point at which they can obtain an updated valuation to which they can attach sufficient confidence.
For the avoidance of doubt, CRR Article 229(1) does not require that a physical inspection be conducted as part of the valuation; firms can continue to use desktop valuations and drive-by valuations where appropriate.
Q2. What approach should a firm take if a house price index (HPI) that is used to update property valuations for capital requirements purposes is unreliable or unavailable?
If an HPI used in capital requirements calculations is unavailable or unreliable then firms may use the most recently available reliable HPI until the point at which the HPI becomes available and reliable again.
The PRA would not expect firms to use the out-of-date index for more than two quarters.
Perhaps the lending bodies should state the precise basis of valuation to avoid surveyors being sued by lenders trying to recover losses in a down turn, as happened in the late eighties causing claim free surveyor’s pii premiums to quadruple or more. Down value is an inaccurate term as value can vary depending on purpose. The value to a seller is the best price it can achieve. An agent will overvalue to allow negotiation or test the market or win an instruction. To a lender It may be the price a second buyer might pay if the first buyer defaults. New property often sells at a premium which cannot be realised on a resale. Prices paid can be over value where incentives are provided such as help to buy schemes. So the use of the term down value has no meaning. I am sure many agents will not agree or accept this view. I anticipate thum downs!
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I have no problem with your points but have been through too many experiences with timid valuers down-valuing for the sake of it.
A surveyor has little or no interest in whether a sale goes through or not – there is a case that can be made to suggest they are less likely to get sued if they down-value and cause the sale to go through – no sale – no potential for trouble.
I’m sure this does not happen with most valuers and am sure the lenders keep a watch out for serial offenders as they don’t want their transactions to fail but we’ve seen all this before in 1974/5, 1988 to 1995, 2001 and 2007.
Is there any way make this more equitable?
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“A surveyor has little or no interest in whether a sale goes through or not…”
Actually, NewsBoy, if you take a cynical view, a surveyor has a slightly greater interest in a sale not going through than if it does.
An abortive sale means the buyer has to buy something else… meaning another valuation. And the abortive sale property presumably secures another buyer… meaning another valuation.
IF the oft-quoted figure of 1 in 3 sales falling through are anywhere near correct, that would mean a potential 300000+ abortive sales. Even if only 10% of those had gone as far as a valuation that’s over thirty thousand valuations spread around the surveyors’ community, every year.
And how many of those potential buyers actually paid extra for a Homebuyers? Or went the whole hog and got a Building Survey?
But of course you’d have to be a cynic to subscribe to that train of thought…
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PeeBee
You are quite correct but in this ever more corporate world the chances of the same surveyor turning up for the next application by the buyer must be pretty slim.
I must admit I have always tried to talk buyers out of using the lender’s surveyor for a Homebuyers or structural. Most of the time the surveyor seems to have travelled from 50 miles away and has little or no knowledge of the local market. Much better to use the good, local, CONFIDENT, surveyor – better for the buyer and better for the seller.
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So PeeBee are you a cynic? I do not agree with valuers being “out of area” and this is where the building socities and banks are significanly at fault. In some areas significant differing of values can occur between one side of the road and the other or even a differing post code! The corporates are just big greedy money making machines who wish to control panels and take a further rake off of fees. Greed not need!. Local knowledge is best on not only values but local soil conditions and many other aspects which could affect risk and value. I hold the view surveyors should work within a 5 mile radius to have a decent understanding of the markets they are working within. I would think it is extremely rare for a valuer to be as unprofessional as is being intimated.
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Will2
I would agree with you that the possibility of such a situation as suggested manifesting be exceedingly unlikely – but not impossible.
And where I would also agree that in the majority of cases, a ‘local’ surveyor be the preferred option (there are certain areas where, geographically, your ‘5 mile radius’ will simply not work), I would also state that there are some surveyors based well within said 5 mile radius that I guarantee you Agents would not thank you for in the slightest if they trundled into their office to pick up the keys for a valuation.
Whilst the vast majority of surveyors are exceedingly good at what they do, like all walks of life, there are certain individuals you wish you never had to interact with – on a professional or any other basis.
These are the ones that stick in the minds of most people, for all the wrong reasons; the ones that might make some people believe that my first post – as cynical and improbable as it was – could have more than a sliver of possibility to it.
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PeeBee, I agree my 5 mile radius being dense urban locations such as of course not rural or country areas.
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Not that you (PeeBee) are a cynic, by any means. 🙂 😉
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I identify as being cynicism neutral, Retiredandrelaxed ;o)
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The statement below is recommended by the RICS to be included on all market valuations at this time.
We are firmly in the middle of a period of “material valuation uncertainty”. Nobody can predict what will happen over the next 3-6 months let alone 2 years.
I think you’ll find that it doesn’t fit on a normal valuation report for a lender… I’m pretty sure nobody would read it anyway.
The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.
Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances which are evolving rapidly on which to base a judgement.
Our valuation is therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty and a higher degree of caution should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of this property under frequent review.
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This is the Banks/Lenders that the UK Taxpayer bailed out financially ……..to the tune of “Billions”, last time.
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