Why bank valuations have nothing to do with value

Let me run you through a scenario. Imagine heading to a dealership to buy a new car. The dealer offers you a price on a car that you love of $50,000 and leaves to prepare paperwork. He is replaced by a new “automotive professional” who tell you that the same car is now worth $55,000. A third appears to tell you that the car has been oversold and is actually worth $45,000. All of them know the car well and seemingly have the same motivation to help you buy the car.

Does the buyer now have confidence in the car? Do they have confidence in the dealership? Will they even want the car anymore? Probably not. The same applies for property, and currently settlement valuations are starting to depict an industry based upon potluck.

While bank valuations are not one of the most riveting subjects in property investment, they are certainly becoming one of the most important. The economic conditions affecting the property market over the past 12 months have seen a major impact in the consistency of bank valuations, and while they were never an exact science to start with, the disparity in recent results have been enough to ruin any buyer’s confidence to say the least.

Big variances in valuations are more and more commonly being seen through different valuers, lenders and their perception of risk. The harsh reality is that the subjective nature of lenders and the pressure they impose to mitigate their own risk is governing valuation results. In recent cases we have seen approved projects with initial valuations ranging up to 15% in price between valuations.

Let me show you some real examples. The below are results from an approved Blue Wealth project that settled over the last quarter. The project was sold at an extremely competitive price point and in a premium location.

Contracted Price Valuation #1 Valuation #2 Valuation #3 Variance
Property 1 $592,000 $565,000 $595,000 $30,000 (5.3%)
Property 2 $393,000 $370,000 $393,000 $395,000 $25,000 (6.8%)
Property 3 $523,000 $490,000 $550,000 $60,000 (12.2%)

You can imagine the discussions we had with clients. The ones affected went through an emotional rollercoaster, questioning their property’s value, only to returned to calm with a different valuation and a vastly contrasting result. Differing opinions saw valuation differences up to $60,000!

We know this drastically impacts the average Australian’s financial position, and the fact that two valuers with the same information can results in a 12% discrepancy is crazy. As Blue Wealth’s CEO Tony Hayek would say, how can two professionals, who studied the same degree with the same expertise and access to the same data come up with results varying almost 15%. Imagine you had applied this to heart surgeons, aeronautical engineers or an accountant preparing your tax return…

The truth is bank valuations are becoming less and less about value and more about a bank managing their risk, and the risk may have nothing to do with the property being valued, but with something like the number of properties that lender is mortgaging in the same area. The major players are forcing the hand of smaller valuers and the effects are nothing less than confusing. Not only does it leave a hopeful buyer in financial distress, but it will likely begin to restrict demand, and therefore the future supply of new housing development if it continues.

Blue Wealth clients are some of the luckiest in the industry, because we know that we will always be able to find a solution to any problem. Our research also allows these scenario’s to be an exception, with the wide majority of valuations coming on contracted price. The best way to avoid this emotional rollercoaster is to be confident in your investment and make sure it is based on solid research. This allows you to ride the wave, trust in the research and your decision to invest and ignore the noise created by factors out of your control.


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