During the past 18 months we have seen more and more cases where contracts are falling through because the bank valuations are not stacking up.
This is not a new issue, but the property industry is starting to see more and more cases as times remain tough. It was actually discussed at the Queensland government's Building Revival Forum in April 2011 and concerns about the issue have escalated throughout 2011, particularly in southeast Queensland.
But with the industry now in the second quarter of 2012, valuations are emerging as a prominent issue nationwide with an increasing number of dwelling sales in both the residential and commercial sectors failing to settle because mortgage valuations are coming in under the contract price.
For example, in Western Australia, Bankwest is facing two potential class actions over the way it re-valued assets and called in the loans of hundreds of its small to medium-sized business clients after a takeover by the Commonwealth Bank of Australia (CBA) in 2008.
Now, I can’t comment on that particular case, but I can talk about my experiences within the Queensland market.
First of all, valuers on the whole are good people who are trying to do a difficult job. And at this point in the market, the banks can often represent a major proportion of their work.
There are some lucky valuation firms in the market that have secured a lot of work from one of the big four banks and that is enough to guarantee the valuation firm’s survival and success. These firms will of course, always try to keep their major customers happy. It makes good business sense to look after your major customer and to ensure they continue to make repeat purchases.
Secondly, as I understand it, property valuation is not an exact science. If it was a science, we would not see examples where valuations on a property by the same valuer can differ by as much as 15 per cent different in just a couple of months or even weeks.
And there have been plenty of documented cases where this has occurred.
Valuations are supposed to be a professional, hands-off estimate of the price that the property could be realistically sold in an arms-length transaction between a willing buyer and a willing seller within 90 days and given a reasonable marketing campaign.
To assess a property’s value, a valuer will measure the property and take into account a property’s unique attributes. This will include:
• Building structure and its condition
• Building/structural faults
• Standard of presentation and fit-out
• Access, e.g., good vehicle access and a garage
• Planning restrictions and local council zoning
The valuer combines these attributes and uses a number of different valuation techniques including recent comparable sales – hard data - and prevailing market conditions to produce a valuation report.
While there are multiple variables involved, it remains frustrating that you can get five valuations from five different valuers on the one property, and they can all be different.
The valuation is as much an art as it is science. And as everybody well knows, art is in the eye of the beholder. Truth be known, valuers can provide a range of values and still meet their professional requirements.
Now, in recent times the banks have grown much more conservative about their lending positions. They want to be protected in a falling market.
Valuers are very aware of this and if their major client is being conservative and wants to be protected, then the valuer is naturally going to be more cautious.
That is not to say that they are acting unprofessionally. They are simply embracing the lower end of the acceptable range of valuations.
And even if that range is only 10 per cent, it can create dire problems for purchasers and sellers of properties.
Take for example a property that sold under contract for $1 million a few years ago in the rising market. The purchasers would have received a valuation “at contract value” and in many cases would have been able to borrow 100 per cent of the value from the banks. The buyer felt confident about the purchase and only needed enough money to pay for stamp duties and their legal costs to settle.
Fast forward to the present day and that same property has sold under contract for $1 million. Because of the perceived weaker conditions, the bank has become more conservative will lend only 90 per cent of the value. The valuer is also more conservative and comes back with a valuation at the lower end of the range meaning the property is valued for $900,000.
This leaves the potential buyer with a major problem. Even if they are willing to accept they are paying $100,000 too much for the property according to the expert’s valuation, they then have to go out and find more than $200,000 or 20 per cent of the contract price to settle the deal (i.e. the bank will provide 90 per cent of $900,000, which equals $810,000. The buyer has to find the $190,000 balance plus stamp duties and legal costs).
What is happening more and more often is that the buyer understandably starts to have second thoughts and tries to get out of the contract. The percentage of sales contracts falling through at the moment is incredibly high. Buyers are even finding ways to get out of unconditional contracts. As more buyers change their minds, this leads to the lowering of prices.
It also leaves the entire South East Queensland region with a major problem. In the eyes of the bank, anybody who bought at the peak of the market now has negative equity in their property. That is, the value of their home is less than the amount that the homeowners owe. For example, on the Gold Coast, some estimates claim that nearly 20 per cent of all households now have negative equity.
This means many homeowners are trapped and the only way out is to either hang on and wait for better times or to get out now and suffer a major loss that they will be paying off for potentially years to come.
It all makes the banks more nervous about lending to that particular region and the valuers have to revise their valuations for the regions.
Now let’s get this into perspective. Nothing much has changed to the properties. They may be a couple years older but other than that they are still the same and there is still buyer demand for the properties. The only difference is the bank’s attitudes to the market conditions and the valuer’s observations of those attitudes.
This conservative approach of the banks and the valuers is driving property prices down. In most cases they are acting responsibly and in their own best interests. Unfortunately, it is not in the best interests of the vendors or the property industry at large.
Lucy Cole is the managing director of Lucy Cole Prestige Properties.