Sustainable values

The urgent driver for sustainable values stems from the housing market collapse of the late 1980s when lender institutions resorted to the courts to establish blame and recompense and it was established that residential valuers failed to adequately assess the risks associated with residential property,which had enormous consequences for the lenders, but more importantly, for the consumer. In this regard, the drop in asset values led to a situation in which 1.7 million homeowners were affected by negative equity and thousands more had their homes repossessed.

Valuers are required to provide an opinion of market value, which is arrived at by analysing comparable transaction prices. In most markets, price is determined by the interaction of supply and demand characteristics. Yet residential valuers tend to be overly-focussed on supply-side variables and in most instances the goal is to confirm the bid price for the lender instead of providing an objective and unbiased opinion of market value.

Fundamentally, house prices had reached unsustainable levels by 1988 because of the pressure placed on valuers by the lender institutions which were more interested in securing the lending commitment, than with the integrity of the valuation advice which would have been concerned to ensure that the mortgage valuation reflected a value (and therefore an amount secured) which could be recouped in a less favourable market. It must be admitted that actual sale prices (which of course were provided to the mortgage valuers at the time of instruction) were significant evidence of the then open market value of the property. However, it is generally understood that, if property is to be security for a loan, then its value for that purpose must be assessed under less favourable (forced sale) conditions, rather than merely the confirmation of a bid price.

Since then professional guidance for valuers has been revised (Royal Institution of Chartered Surveyors in association with the Incorporated Society of Valuers and Auctioneers, Institute of Revenues Rating and Valuation, 1995)but valuation methodology remains unchanged, suggesting that should asset values rise and fall in the future, a similar set of negative impacts are likely to occur. Valuers are aware of the importance of sustainable values but because of lender pressure (which can take the form of threats to their income), they are forced to overlook the long-term economic sustainability of residential property assets and merely confirm the sale price.

By comparison, commercial valuers take a more balanced view analysing both demand and supply factors to arrive at a market value. While this does reflect the importance of income (lettings) in determining commercial values, implicit within a commercial valuation is an assessment of the sustainability of values. A more forward-looking approach to residential valuation from both valuers and lender institutions should result in more sustainable valuations, reducing both the risks of negative equity and volatility in house price markets, and thereby provide a more stable social and economic environment.

In terms of approaching sustainable value, the supply of residential property in the short-term is finite – increases or decreases in demand will merely feed through into higher or lower prices. A valuer must discover if those changes in prices are the result of transitory factors, e.g. a temporary government reduction in stamp duty; or permanent influences, e.g. an increase in population. If the change in value is temporary then the valuer should discount the increase from the point of view of a sustainable valuation. If the change is permanent then the valuer must consider what impact the change in values will have on increasing the longer-term supply of houses and then assess how much of the increase in values should be included in the sustainable valuation.

Those lenders which do assess sustainable value do so slightly differently as they merely wish to ensure that the value of the property does not fall below the value of the loan at any point in the future – thus, for them, the measure of value should reflect the sustainability of the bid price. A market which is characterised by booms and busts, with consumers being seen to suffer both financially and socially, must be in need of formal regulation, a change which is likely to bring with it higher costs and less flexibility.

With approximately 40 per cent of all personal wealth tied up in housing,such a large and dynamic market clearly impacts on the whole of the social and economic health of the nation. The importance of the housing market and its effect on the nation’s economy has been publicly recognised by the Chancellor of the Exchequer and measures to “dampen down” the recent housing market rises threatened. Government policies encourage the creation of sustainable communities and there is an important role for those directly involved in the mortgage process, including the valuation profession to play in this regard – not merely for the sake of their reputations, but also for the wider economic and social health of the nation. Ultimately, it is not just the consumer who will again lose out if the sustainability of residential values is not properly addressed, there are much wider social and economic implications which we cannot afford to ignore.

Jacqui Daly