1. Accuracy of valuation models

2. Accuracy of valuation models

3. Context Breakdown by ownership:
55% owner-occupied
30% social housing
15% commercial rent
Young people are basically “forced to buy”
Most first-time buyers have an 100% LTV

4. Central Bank’s Research
In March 2019 the Central Bank presented a report on valuations
Conclusions:
95% of valuations are at or above the sales price
30% - 35% exactly at the sales price
On average: 5% “overvalued”
Valuers aren’t independent

5. Legislation

6. “The Dutch Decree” (I)
Act on Financial Supervision (Wft) (wetten.overheid.nl)
Article 4:34, section 2:
“To prevent excessive consumer credit the mortgage lender shall not enter into a credit agreement with a consumer and shall not make a significant increase in the credit limit or the sum of the amounts made available to the consumer under an existing credit agreement if this is irresponsible.”
Article 4:34, section 3:
“Rules may be laid down by ministerial decree with regard to the first and second paragraph.”

7. “The Dutch Decree” (II)
Ministerial decree on supervision (wetten.overheid.nl)
Article 115, Section 6. The value of a domestic property is:
The total sum of costs or the contract sum in cases of newly constructed properties;
The market value of the property as valued by a professional valuer as stated in a valuation report not older than one year;
The value assessed on the basis of the Special Act for Real Estate Assessment or the value derived from an AVM on the provision that in both cases the amount of the mortgage credit may not exceed 90% of the assessed value of the property.

8. “The Dutch Decree” (III)
Explanatory memorandum (officielebekendmakingen.nl)
R (article 115 BGfo)
“…For model-based valuation, providers must also use model-based valuations that meet reliable standards. Standards for valuation are considered reliable if they are in accordance with internationally recognized valuation standards. This means that providers must make sure that certain requirements are met, such as the import control, the parameters and the quality of the model. Valuations with insufficient reliability due to the character of the house should be excluded.”

9. Dutch Decree (IV) AVM’s are allowed, but which are good enough?
So far, banks do not really use AVM’s
Additional regulations needed

10. Guidelines on AVM accuracy (I)
Uniform “indicator” of level of accuracy of individual valuations (i.e. probability distribution)
Mandatory “back testing” of accuracy indicator
Mandatory, uniform overall quality control (i.e. twice a year)
Ratio studies
Out-of-Sample tests
Margin of error
Dispersion of ratio’s
Mandatory checks on model input quality
Annual external audit!!

11. Guidelines on AVM accuracy (II)
Banks may only apply models, if the AVM-supplier proves his model is sufficiently accurate
Level of quality:
Average ratio between 0,97 and 1,03
Margin of error: 0,05
Dispersion <10%

13. Questions? b.bervoets@waarderingskamer.nl