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When a valuation is not a valuation
Released 26 August 2011

Recent media attention has put the spotlight on the rise of online property ‘valuation’ products. The potential risks to consumers using these ‘easy’ and sometimes free ‘valuations’ have been less widely publicised and are not well understood by the public or consumer protection authorities.    

REINSW and the Australian Property Institute (API) have called for the practice of providing free online ‘valuations’ to be investigated by regulators, including the various state Fair Trading offices, not only to protect the role of registered property valuers, but also to protect the public who may not understand the complexities involved in completing an independent, professional valuation.

National President of the Australian Property Institute, Philip Western, said it was important for consumers to understand the ‘free valuations’ are based on quantitative information only. They do not involve an inspection of the property, do not take in to account the actual condition of the property, and should not, ultimately, be relied upon by consumers as a substitute for an independent valuation.

"Statistically Generated Assessment Models (SGAMs) have a limited place in the lending institutional environment dealing with portfolio and mortgage situations, however I have real concerns when such a product is made available to the consumer under the guise of a valuation,” Mr Western says.

“It is important for the public to recognise that what they are getting is a SGAM and that a SGAM is not a valuation completed by an independent professional valuer.”

REINSW’s Valuers Chapter Chair Colin Rooke said support of extra low cost online valuations by banks and lending institutions contributed to an incorrect perception that valuations could be done cheaply and also encouraged a lowering of professional standards.

“There is a reason that professional valuers undertake an initial course of study lasting many years and that is to qualify for registration as valuers under the Valuers Act 2003,” says Mr Rooke.

“Correctly valuing a property is difficult, requiring consideration of many factors. It is not an exact science and this view has been endorsed by the High Court of Australia.

“The skill and experience of the valuer are essential in getting it right. It is not simply a number crunching exercise that can be completed in a few seconds, using some algorithm.”

Mr Rooke gives a simple example. “House statistics for Sydney’s top suburb, Point Piper (Capital Growth in Median Prices), showed a drop of 31.9% for the year 2011, while they showed an increase of 44.6% for the calendar year 2010. How are these erratic ‘Statistically Generated’ figures of benefit to the consumer who may have purchased their home last year and now needs to sell because of an employment transfer? Does the consumer confidently accept the new statistics and sell their home for 31.9% less than they paid last year?”.

“Banks have an enormous amount of influence on valuers and on consumers,” he says. “A real problem is that in recent years, banks have driven the price of valuations down so low, and pressured turn around times so much, that they are accepting sub-standard valuations.

“Experienced and thorough valuers, who cannot compete on price, are carefully considering their future in the profession with some already voting with their feet and leaving the profession.

“If SGAMs continue to be promoted in the marketplace as a substitute for independent valuations this trend will only accelerate.”

This lowering of standards is becoming a major concern throughout the profession.

“The banks don’t seem to really care, as it would appear the professional registered valuer is now regarded almost as a de facto mortgage insurer. We are all aware that APRA has been remiss with their obligations in the past, to the detriment of consumers and I would hope they are now fulfilling their statutory obligations,” Mr Rooke says.

He believes that, ultimately, consumers and the wider community would suffer from the use of low cost online ‘valuations’. “Lending decisions will increasingly be made on inaccurate data sourced from statistics and a computer program, which does not have regard to real market factors and does not take into account all the discretionary factors which actually affect the value of a property.

“We need to look beyond the mere price of a valuation, and actually focus on its content.

“I believe banks and other financiers have a responsibility here to avoid cut-throat cost cutting when selecting valuations, in order to boost their profits by cutting fixed expenses” he says.

“The downside of cheap ‘valuations’ will ultimately come back to bite the banks and their consumers.

“Unfortunately, through many years of indoctrination by the ACCC, price competition has also been instilled in the consumer as the paramount consideration when selecting any product or service. The result of this is readily evident in other areas. Had many of the badly affected Queensland flood victims not been so driven by the desire to obtain the cheapest possible insurance, but instead focused on what their policy actually covered, there would be less heartache than now exists.”

Mr Rooke has a final warning for consumers. “You get what you pay for in this world, you can only get a bucket of water out of a bucket of water and consumers should attach due weight to free or cut price SGAM ‘valuations’ before embarking on what will probably be the biggest financial investment decision they will ever make.”