Evolution of valuations for mortgage lending purposes 22nd Pacific-Rim Real Estate Conference University of the Sunshine Coast 17-20 January 2016 Vince Mangioni University of Technology Sydney

Paper objectives Examines the evolution of the banking sector and purpose of mortgage valuations . Cases have been reviewed that have presumably endorsed the purchase price of property as the best evidence of value, subject to meeting the Spencer Test. Define the valuers role and examine the practices in undertaking mortgage valuations.

Exit of government from banking since the 1990s The Banking sector has progressively privatised following the recommendations of the Campbell inquiry of the late 1980s The Commonwealth Government progressively privatised the Commonwealth Bank, with an initial public offering in 1991, and a subsequent float of the remaining equity in July 1996. State governments have also sold or privatised State financial institutions, including: in 1991 the Victorian Government sold the State Bank of Victoria to the Commonwealth Bank; NSW Government in December 1994, sold the State Bank of NSW to Colonial Mutual Life; and, 1995, the South Australian Government sold the State Bank of South Australia to Advance Bank.

Privatisation of valuation services Following the sell off and privatisation of the banks by government a number of services and sector have privatised which include valuation services. Where valuers were prior to privatisation employed directly by the banks, since the early to mid 1990s valuation services are tendered out resulting in many valuers transitioning from employee to contractor.

Privatisation of valuation services In the case of mortgage valuation work, many of the employees of lending institutions set up practice and began contracting valuation services back to lenders from the early 1990s. This was seen as a way of creating market efficiency in the cost of valuation services, in addition to the perceived benefits of creating a regulator and operator relationship.

Why are valuation’s for mortgage lending necessary “All assets taken as security by approved deposit taking institutions (ADI’s) should be valued, wherever possible, at their net current market value” (Australian Prudential Regulation Authority, 2000:1)

Transfer of risk In reality, the valuation provided by the valuer to the lender constitutes an insurance policy, which effectively allows the mortgage insurer to insure the loan and cover the lenders loss and recover a loss from the valuer for over valuation.

Valuation fee as a percentage of the mortgage insurance Property Value Loan Amt as % of property value Mortgage Insurance Valuation Fee Valuation as a % of Insurance $500,000 81% $2246 $220 10 85% $4505 5 90% $6660 3.3

Survey process Surveys were distributed to 110 valuers in medium to large valuation practices across Sydney and New South Wales by post, with 43 surveys returned. The survey addressed questions about purpose, risk, evidence and information sources that valuers rely on in undertaking valuations for mortgage lending.

Valuation purposes Purpose % of valuation work Mortgage 38 Transfer / Capital Gains Tax 22 Family Court 16 Buy or sell advice 14 Objections & Acquisitions 4 Other 6

Risk rating of mortgage valuations by valuers on a scale of 1-10 Valuation sub-purpose Median Risk Rating Average Risk Rating Sale over the subject property plus several current comparable sales 2 2.3 Refinancing of a property and no sale over the subject but several comparable sales 3.5 3.4 A sale of the subject property and no comparable sales evidence 5 5.4 Refinance with no sale over the subject property and no comparable sales 7.5 7.6

Number of sales used to confirm value Minimum sales Number of valuers Median years experience 3 12 10 4 16 20 5 8 6 or more 7 30

Sources of sales data Source No of valuers % of valuers RP Data 25 58 Agents 6 14 Red Square Aust Prop Monitors 3 7 Realestate.com 2 4.7 Other 1 2.3 Total 43 100%

Is property transaction data available in an acceptable timeframe   Yes No No of responses 11 32 Percentage 25.6 74.4 Sales data and information Information  % of valuers No of bedrooms 80 Area of the dwelling 50 Additional data sought = floor plan & living area size / orientation

How often are you contacted by a lender when your valuation is lower than the purchase price 86 per cent of the time Lending institutions will generally lend on the lower of either the purchase price or valuation

Emerging practices of residential / mortgage valuers Houses Reviewing development application registers at local government for recent alternations and additions. Strata Title Use of income (capitalization) method of analysis where property is held by investors and are subject to leases. $m2 of sale price – Sale price / internal area as per strata plan Holding periods Units and houses within suburbs / locations over the past 10-15 years changes in frequency of turnover.

Conclusion Banking sector has progressively privatised and government has moved away from ownership of banks. Valuers have moved from being employed to contracting for mortgage lending purposes with mortgage valuation being the dominant valuation purpose. Valuers practices are evolving in mortgage valuations and they are seeking more detailed information and in a more timely delivery. A hiatus has developed in the training of valuers over the past 20 years with outsourcing of valuations by government agencies.