In past articles I have written about how banks have been forced to become more conservative in their residential property lending. They have generally done this by reducing LVR’s tightening servicing requirements, increasing living expenses and using price as a way of turning a particular tap on and off (such as lending for investment properties). An area we have not seen much written about in the past is probably the area of greatest complaints. Valuations.
All lenders these days either use a panel (external) valuer or have an online system that spits out a valuation. Regardless of what has happened in the neighbourhood – and this appears to be almost without exception – almost all bank valuations for residential property seem to come in around 5-15% below actual market values.
The variation appears to depend on a number of factors such as the location of the property, where we are in the property cycle, the price of the property (discounts seem to be greater with properties over $2M), the policies of the valuer and many other factors.
However, and in the interest of fairness and full disclosure, just this week we received a valuation that was around 24% higher than the client’s expectations. This was the exception to the rule. This is not new. It’s been going on for years. So our advice to potential clients that are seeking to refinance is to accept that the bank valuation will usually come in under their expectations. This can be a bit of a shock to some clients.
Where it can be an issue is if the Loan to Valuation Ratio (“LVR”) using the clients valuation is under 80% and the LVR after the bank values the property is over 80%. This will mean that the client will have to stump up for Lenders Mortgage Insurance (“LMI”).
If your refinancing, this may stop you in your tracks as it can be quite expensive and can cost tens of thousands (depending on the size of the loan). However, if the valuation comes in under and doesn’t cost you any more –with an LVR under 80% – then what’s it matter? You still get your loan, the rate is the same, the repayments haven’t changed. So why get all worked up about a number that alters nothing, means nothing and costs nothing?
When all is said and done, the value of your property is worth what someone is willing to pay for it and not a value placed on it by computer software or a valuer. If you really want to test the farcical nature of valuations, try asking for a normal bank valuation using one valuer and then use another valuer to value the property for stamp duty purposes (say for a part transfer of title).
I will bet you London to a brick that the second valuation will come in much lower than the first every time.
For the purposes of research I contacted a few valuers to find out what metrics they use and how they arrive at their valuations. They were a little shy in giving me any detail once I explained that it would be for publication. However, as stated above, it may not really matter. voodoo valuations? More like idiotic.
There has to be a better way of doing this. Until there is, we’re stuck with the system we have.