An increase in lenders placing down valuations on properties could signal a growing anxiety over the health of the housing market, experts have warned.
Leading mortgage brokers told the BBC’s Victoria Derbyshire programme there has been a significant rise in the number of homes being valued by banks and building societies at less than what buyers have agreed to pay.
In the past two years, the number of sales resulting in a ‘down valuation’ has increased from one in 20 to one in five – the highest level since the 2008 financial crash.
The number of sales resulting in a down valuation has increased from one in 20 to one in five
And experts warn this conservative behaviour may be a sign that banks and building societies are worried about house prices dropping in the near future.
When a home is bought with a mortgage, the lender will put a valuation on the property to ensure the price paid represents the market value.
While a homebuyer may be willing to pay over the market value to secure a property, this places the lender at extra risk.
If the lender’s valuation is less than the price the buyer has agreed to pay, this is known as a ‘down valuation’. It can lead to buyers having to front thousands of extra pounds to secure their new home, or risk the property sale falling through.
Online estate agent Emoov said that one in five of its sales now resulted in a down valuation, compared to fewer than one in 20 just two years ago.
Emoov chief executive Russel Quirk told the BBC that the increase was the result of surveyors, who act on behalf of the lenders, ‘covering their backs’ in the event of a financial crash.
‘Surveyors are prophesising a crash,’ he said. ‘The system is built to protect them.’
The trade body for surveyors, the Royal Institution of Chartered Surveyors, insists however that all valuations are independent and accurate.
‘It is questionable whether the term “down valuation” is an accurate reflection,’ a RICS spokesperson told This is Money.
Estate agents warn lenders are insulating themselves from a crash by undervaluing property
‘The market value is based on comparable market evidence, usually a minimum of three sales transactions of similar properties in the local area, and also the professional’s knowledge of the local market including supply and demand dynamics.
‘For this reason, it is quite possible that the valuation for the lender – the market value – does not match an asking price for a property that has been set by the seller or agent.
‘When house prices are falling or rising at a faster rate than typical, as they are in some areas of the country, or when transaction levels are perhaps not what they might be, surveyors have to be very certain they can evidence the value on paper and always strictly follow valuation guidelines.’
During March this year, 86 per cent of properties sold for less than the asking price — the highest level since records began in 2013, according to the National Association of Estate Agents.
Not everyone is convinced that a crash is on the horizon, however. Nick Morrey, of mortgage broker John Charcol, said: ‘A financial crash. Really? I disagree. I predict a further reduction in the number of properties coming to market, which will restrict supply, which will reduce the chance of a crash.
‘For Emoov to predict a financial crash I would question their macro-economic credentials and sources of data to make that assumption.
‘I do not presume to have access to the same data as the Bank of England, but the signs I have seen so far are not for a financial crash for the banks or the economy. But that is not to say that cannot happen.’
A UK Finance spokesperson said: ‘Lenders have a responsibility to ensure that the value of property taken as security on mortgage loans is current and realistic.
‘Lenders only use valuers who are trained professionals, who work to industry standards and base their valuation on comparable recent property sales. Valuers are under a duty to ensure that their valuations are as accurate as possible.’
Lenders are doing more to get you through the door – but what does this mean for house prices?
Borrowers looking for a mortgage with no arrangement fee are seeing a widening choice of deals, research has found.
Four in 10 of mortgages on offer are now arrangement fee-free, up from 33 per cent two years ago, according to Moneyfacts.co.uk.
Charlotte Nelson, a finance expert at Moneyfacts, said the number of ‘fee-free’ deals has increased by 274 since the start of the year – which is ‘great news for borrowers looking to keep costs down’.
Banks are increasingly employing new deals to get customers through their doors, including allowing some customers to borrow up to six times their income and even offering forms of no-deposit mortgages.
So what happens next?
Simon Lambert takes a look at the house price forecasts for 2018 and whether property will rise, fall or flatline in the year ahead.