Get it right first time

The term ‘down valuation’ is increasingly creeping into discussions we have with our lenders and brokers, but it is a term which nearly all valuers frown upon. Recent data from the Halifax House Price Index in May 2022 suggests the housing market has begun to show signs of cooling, so are we likely to see this phrase being used more and more as we go into the second half of 2022?

The first, and probably most important point to discuss, is that there is only ever one market value. The RICS clearly defines market value as the sum payable for a property in an arm’s length transaction made between a willing vendor and a willing buyer assuming the property has been properly marketed. It is down to the valuer’s skill, expertise, knowledge and judgment to collate relevant comparables, analyse and interpret market data in order to arrive at the market value. The role of the valuer is difficult in nearly all market conditions, particularly in today’s market where there are so many direct and indirect factors impacting the market.

Valuers have a duty of care not only to the lenders relying upon their reports, but also to their professional indemnity insurers, and the RICS which regulates valuers in the UK. They work under strict ethical and professional standards, and they should always act without interference, influence or any conflict which may effect their judgement. So, valuers have a fairly difficult job to say the least.

The second, and probably just as important as the above point, is where does the estimated value come from? This figure could be based on a previous valuation undertaken at some point in the recent past, it could be the borrower’s gut feel, it could be because the neighbouring property sold for a similar price, it could be because an offer has been tabled at that level, etc. Unless the property is under offer and the valuer can see a clear and transparent bidding history, then the valuer is likely to have very little regard to the estimated value.

Valuers deal with fact with professional judgement and expertise woven into market data in order to arrive at their opinion of market value. They can’t forecast what the market could do going forwards, but it’s very important they reflect market trends.

Going back to the Halifax House Price Index, they also report mortgage activity has started to come down which coupled with inflationary pressure, market activity is likely to slow. According to the HMRC, monthly property transactions data shows UK home sales decreased by 3.9% in April 2022 and further data from the Bank of England show the number of mortgages approved fell in April 2022 by 5.1%. The data doesn’t all show a negative story, in the latest RICS Residential Market Survey, they reported a net balance of +10% of respondents reporting an increase in new buyer demand during April.

There is no question that inflationary pressures on household budgets is dampening buyer appetite, and market activity is likely to slow. This puts even more pressure on the valuer to undertake thorough market investigations and use sufficient market evidence to justify the market value reported. Whilst often the market value will fall below expectations, there is very likely to be a well thought out justification and rationale why the market value falls short of the estimated value. A well written valuation report should be easy to follow and the market value fully justified. At VAS Panel, we encourage our panel valuers to articulate as much of their thought process within a report allowing lenders to fully understand the rationale, and where needed, a follow up conversation is often useful.