Increasing disparity in property prices is piling pressure on lenders when it comes to valuations.
Rising interest rates, global uncertainty and plummeting domestic affordability have made property valuations considerably tougher over the last few months in what is becoming an increasingly patchy property market.
And as lenders demand tighter valuations to better manage their risk exposure, the valuation process is continually evolving – with a number of tools now available to ensure more accurate valuations.
Adrian Winskill, national manager of sales at Valuation Exchange, says he has observed a change in attitude as lenders question data and comparison methods, and even the validity of photographs of properties.
“There has definitely been more queries about whether comparable sales reports are the most appropriate system for measurement,” says Mr Winskill. “Lenders are paying a lot closer attention to the reports they receive – for instance some lenders may call into question photographs of properties because of the angle the photo was taken.
“There is certainly a conscious movement towards quality in the mortgage lending industry, making the valuations process more essential than before,” he says.
A strong economy and a growing appetite for home ownership in the face of high rental costs have contributed to sustained growth in most property markets in recent years.
But accelerating property prices, lagging wages and a worrying inflation level – not to mention the fact that the average borrower now spends around 35 per cent of their household income on mortgage repayments – has made valuing property progressively trickier.
“We’ve been hearing some concerns from lenders about current sales values – and the possibility of defaulting borrowers and even fraud,” says Rob Walker from First American, a business information provider based in the US. Walker has been touring Australia with RP Data, examining credit risk management and the valuations process.
Amid such concerns – and market fluctuations – the dangers for valuers in projecting price growth are obvious.
While most Australian capitals experienced rising house values last year – five per cent in Sydney, 20 per cent in Brisbane and Adelaide and 25 per cent in Melbourne, according to data Australian Property Monitors – Perth prices plateaued, and outer suburbs in most capitals lagged behind or dropped in value.
But valuers can take some comfort. Mr Walker has found that Australian valuers are well placed to cope with the credit policy needs of lenders in the current environment.
It’s all about trusting the valuations, he says. What he’s seen among the large lenders and insurers is an increase in the use of automated valuation model (AVM) audit tools – which gives them the high and low forecasts for Australia each week and to look for valuations that might fall outside of these.
But lenders who may be tempted to pressure valuers to up their valuations to get a deal over the line should take heed.
“It’s not good for the lenders’ loan book or the valuers’ professional standing,” says Brendon Hulcombe, CEO at Herron Todd White, a leading nation-wide valuations firm.
Mr Hulcombe says he believes leaner times often give rise to two distinct camps of lenders: those who use transparent systems to obtain accurate estimates and those who will shop around for the deal they need to write the loan.
He says in the face of pressure from lenders as well as borrowers, valuers need to stick to their guns.
“When you get to a point in the market where community expectations are still going up but actual values are staying still that’s when you have problems. You have to hold your nerve and quote a realistic price, even though it might not be popular,” he says.
All in the data
In the face of increasing scrutiny, technology is also helping to support the valuations industry as it sharpens its focus on best practice.
There is a range of valuation tools and options available to lenders to help ensure the integrity of their loan books in the current climate, including risk assessment tools.
“The presence of second and third statistical opinions when property prices are shifting is essential,” says WBP Property Group’s Greville Pabst, who adds that the spread of data and technology used will allow for a more rapid and accurate response.
Valuation Exchange, for example, collects and reports on its data down to a postcode level, making it far easier to compare and track price trends and variants.
“It means we can remain on top of emerging trends – rather than relying on an independent valuer to take note of when property prices are turning in a specific area,” says Valuation Exchange’s Mr Winskill.
The company’s compliance module is also built into its platform – which allows the business to factor in any additional risk requirements lenders may have when they’re making their assessments.
Lenders can also use the valuations industry’s AVM audit tool to monitor market ups and downs themselves, according to Graham Mirabito CEO of RP Data.
Mr Mirabito says as the industry focuses more on best practice, the better valuers are taking a strategic approach to using tools such as AVMs, regarding them as a “value add on”.
“Those valuers who are adding on AVMs to full valuations are doing their due diligence and using technology to their advantage – rather than taking on the attitude that they are in competition with AVMs,” says Mr Mirabito.
While there’s little doubt that technology will help the valuations industry keep pace with market movements, valuers say the increased need for valuations is likely to impact turnaround times.
“We have to factor in a small percentage of extra time for an increase in queries or time to investigate any red flags that the system detects when processing a valuation in the current conditions,” he says.
Herron Todd White is also preparing for an increase in activity, according to Brendon Hulcombe.
“The technology we use allows us to complete 1.1 valuations every minute but in the current environment we may find that we have to reject excess work,” says Mr Hulcombe.
While valuers may come under increased strain, the overall industry consensus is for the development of a strong, more robust valuations sector. In a property market currently in a state a flux, valuers need to go beyond simply offering a service to assist lenders settle loans – they must add value through helping lenders mitigate risk with tight valuations commensurate to market conditions.