Valuation Industry In The Grip of Change

Big mainly technology-inspired changes are sweeping the residential valuation industry, causing relief in some quarters and concern in others.

Technology can bring relief when it supplies tools for efficiency. There can be concern when jobs are threatened, or if technology is badly applied.

Before granting home mortgage loans, banks and other lenders need to conduct a sound security assessment. Obviously where the level of risk is high, thorough internal inspections should be undertaken by a professional valuer.

But in the mid- and low-tier of risk these types of inspections are clearly a waste of resources. A better arrangement is one where data tools can be used to deliver security assessments in the mid- to low-tier risk areas, while mandating full internal inspections when certain essential criteria are not met. This is the logic behind the development of EVR, the most important driver of change in the valuation industry.

Other (lesser) drivers are the use of restricted valuations or ‘kerbsides’ (based on external property inspections) and statistical models (used by forecasters to make property assessments based on general market data). Most banks, under cost pressures, have at some stage resorted to restricted valuations or statistical models.

EVR was developed for those banks seeking an assessment method more in keeping with modern risk management practice, and with quality and cost control processes. It replaces restricted valuations and statistical models.


The Problem With Restricted Valuations

Restricted valuations, which currently address the middle tier of risk, reduce costs because they require only an external inspection of the property along with the usual check of registered plans, zoning information and sales over the past three years.

However, their main weakness is that they are ‘trust-based’ and don’t address the banks’ need for process, checks and balances. Among the risks they present are:

• no confirmation that a property inspection took place, and if it did, that the correct property was inspected;
  
  
• no proof that any other comparable sales were examined;
  
  
• no provision for auditing the assessment;
  
  
• no requirement to consider any features that could influence the assessment;
  
  
• no provision to collect information (e.g. dwelling type, land size) that can be used for later use or reference.
  
  

One of Australia’s largest banks has abandoned the use of the restricted valuation method altogether as a result.

The Problem With Statistical Models

The least cost option is the statistical model, developed by forecasters who collect general market data and apply a scaling factor to all properties based on this data.

Models, by the nature of the data and analysis, contain large undefined variances that provide a high level of risk for a lender. Models can predict overall or average reliability, but cannot deliver with certainty accuracy on an individual property. However, it is on the individual properties that the lender lends - and not market averages. The inability of models to predict which assessments are likely to be wrong and by how much is the primary area of risk for the lender. Very high standard deviations are common in the financial data collected by banks trialling model solutions.

Statistical models also do not examine the detail or characteristics of the individual property. They do not use trained valuers or any type of valuation method. This limits their ability to allow a third party to cross check the derived answer.

EVR Eliminates The Problem

EVR combines the skills of valuers with the use of technology to improve the assessment process and replace restricted valuations and statistical models. By emphasising process, checks and balances, it answers the banks need not only for efficiency, but also for certainty and accuracy in the security assessment.

Regulation and Review | Back to Top

The main organisations that review practices or have an interest in the property and valuation industries are the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA), the Australian Bankers’ Association and the Australian Competition and Consumer Protection Authority (ACCC – in NSW the Office of Fair Trading).

The role of APRA is establish and enforce prudential standards and practices of Australian financial services providers such as banks, credit unions, building societies, insurance companies and members of the superannuation industry.

The main responsibilities of the RBA are monetary policy, maintaining financial system stability and promoting the safety and efficiency of the payments system. The RBA Bulletin of July 2004, addressed the inadequacies of Australian property market data, citing areas of deficiency as property data timeliness; property compositional change; and housing quality and capital improvements.

The ABA acts on behalf of member banks to provide an industry position on government policy or legislation. Working with the membership, the ABA provides analysis, advice and advocacy, and contributes to the development of public policy on banking and other financial services. It works to foster an environment in which financial services are valued and can prosper.

The NSW OFFICE OF FAIR TRADING is the State’s consumer protection agency. Part of its responsibility is to advise traders on fair and ethical practices, maintain product safety and standards, investigate unfair practices and, through a licensing system, ensure unqualified or inappropriate people do not work in a range of industries.