Down Valuations In The Mortgage Market Are Causing Estate Agents Problems
A report by the National Association of Estate Agents (NAEA) has shown that mortgage lenders are down valuing properties.
The association goes on to say that this is having a detrimental effect on the property market and suggest that undervaluing could be happening by as much as 10%. Many of the associations members have had a problem with down valuations, in respect to valuations.
Such problems can have dire consequences for the seller, as this will reduce the amount of equity they have in their property.
Peter Bolton King, chief executive of the NAEA, says: “Our members have heard in several cases that lenders gave specific instructions to their valuers as to how they should approach these valuations.”
Although estate agents might be crying foul why might this be a necessity?
During the so called boom times lending soared. Prices rose. In fact they increased ahead of any form of inflation, including wages. This has made buying a property incredibly hard for many people, mainly due to the increase in deposits needed due to property prices being high and now the lenders insist on large deposits even though house prices have fallen.
Currently we are seeing increases in unemployment, wage deflation which is forcing lenders to be more aggressive with their under writing as a consequence. Can they really be expected to take 100% of bonus’s or all of an individuals commission as part of their affordability calculation?
With people not being able to (or afford to) borrow as much from lenders and the outcome for the jobs market not looking so secure in the short term, it is no surprise that lenders expect prices to fall further, and therefore no surprise that valuers are probably valuing on the cautious side.
But should we really be seeing large scale down valuations?
Well, there was a key word that I missed out from the word valuation and that is the word “mortgage”. Lenders when considering a mortgage application request a “mortgage valuation” to be undertaken on their behalf. This is paid for by the borrower (normally) and used by the lender to assess the property.
It is for lenders to assess if they feel the property represents a good risk to the bank. They may give the surveyor specific instructions, which can include asking for a forced sale price as well as the open market price. If the forced sale price is within a certain tolerance the application will proceed to offer. This helps to ensure the bank lends on quality property.
Each lender will have its own lending criteria to ensure the application meets it own lending objective and at the same time maintains the quality on its books. However, not all lenders are the same and not all will aggressively value your dream home – but some might.
With such a lack of quality property on the market we are seeing asking prices hold and people willing to pay the price that is being asked. Estate agents and vendors may not have considered the effects the changes in lending policy is having on the property market.
It has been widely said that the market dictates the price. This point is only true in a cash market, not when you are reliant on a bank having the same view as you, if the bank does not agree you could find yourself with a shortfall.
The average price for a property is in the region of f150, 000 and the average salary is approximately f24,000. You would need to borrow 6.25x salary to achieve this, beyond most lenders income multiples. A substantial deposit of 50k would also make the purchase possible, something that is only achievable through equity for most people, something that has been shrinking.
So in reality are the banks being really aggressive in valuing, perhaps not. The prudent approach that was required over the last decade is now potentially being implemented and this is being played out (in some instances) in the form of how they expect the mortgage valuation to be carried out.
As a result we are now seeing some down valuations and other forms of increased case assessment, which may in turn put further pressure on house prices as purchasers find it harder to raise the finance to the kind of levels we have seen previously.
This will mean prices will have to fall a little more before the wheels begin to go round at any real pace. Prices holding because of a lack of property is not a sound basis for a recovery.
House prices will ultimately be underpinned by employment and the ability to borrow. Employment is on the increase and banks are being encouraged to be more prudent.
This has a direct effect on how lenders set their lending policy and in particular how they value property in a decreasing market. So in reality for a variety of reasons down valuations are here to stay – for a short while at least!