Negative equity on the rise

tobe · 21st Mar, 2012

Your all getting a little tied up in knots.

if one bank decided to instruct their valuers to be conservative, it would have no effect of improving the look of their balance sheet currently because the reduced value is noted on their balance sheet. However, in time if the market discovers the 'new' value, and the bank book the new value to their balance sheet, their balance sheet improves markedly.

Now, banks dont instruct their valuers, however many valuers are just naturally conservative, if they all took a conservative approach, it does certainly have a self fulfilling prophesy effect, with prices spiralling downwards, just as they spiraled upwards when prices were going up.

As to the comment about 'real' value, or underlying value, there is no such think. A bank valuation is how much the valuer reckons the bank could offload the property for in 30 days with a sign saying 'mortgagee in possession'. A real estate appraisal is how much it takes to get the vendor to put the property on the market with that particular estate agent. A sale price is how much said estate agent was able to condition down the expectations of the vendor. Many argue the only real way of assertaining value is based on yield alone. Residential property investors that negatively gear seem to want to have a bet each way.

speed1000 · 21st Mar, 2012

I know that is does not appear to make sense but I have spoken to 3 independent property valuers and they assure me that is what they have instructed to do. I thought it sounded unbelievable until one of my wife's work colleagues in an accounting firm got a bank valuation done a month ago on a property at Springfield lakes they bought in 2009. It was valued $40,000 less then they had purchased which confirmed what I was told was actually happening. The reason they got bank valuation done was to use the equity to buy a new car and were denied.

Propertunity · 21st Mar, 2012

speed1000 said:
....I thought it sounded unbelievable until one of my wife's work colleagues in an accounting firm got a bank valuation done a month ago on a property at Springfield lakes they bought in 2009. It was valued $40,000 less then they had purchased which confirmed what I was told was actually happening.

With respect, that does not confirm anything, other than the market in Springfield Lakes has gone flat to slightly negative since 2009.

Rolf Latham · 21st Mar, 2012

speed1000 said:
I know that is does not appear to make sense but I have spoken to 3 independent property valuers and they assure me that is what they have instructed to do. I thought it sounded unbelievable until one of my wife's work colleagues in an accounting firm got a bank valuation done a month ago on a property at Springfield lakes they bought in 2009. It was valued $40,000 less then they had purchased which confirmed what I was told was actually happening. The reason they got bank valuation done was to use the equity to buy a new car and were denied.[/QUOTE

the state of the market perhaps

Id agree with prop that, in part, some areas are softer since the mini boom, especially so in new estates.

Until a valuer that I work with, or one that pops up here, and says "we are having a gun held to our head........." Id suggest this to be third party data with no real evidence at this point.

Often wrong, and never in doubt, but happy to be corrected on the "en masse" instruction of lenders to valuers to down val by x %.

ta
rolf

ta
rolf

Sunfish · 21st Mar, 2012

pieman said:
As opposed to many doom and gloomers who typically haven't invested in anything and are praying for a downturn so they can purchase something on the harbour at "fair market value".

That's rubbish and if you aren't aware of that then you should examine your blinkered outlook.

The one thing about generalizations is that they are generally wrong.

charttv · 21st Mar, 2012

Token Funder said:
but I think on the balance of probabilities Perth has at the very least stablised.

agreed.....

Deltaberry · 21st Mar, 2012

Ausprop said:
no because they are lending less. Valuations set the market just as much as the market sets the valuations. just as credit fuels property prices

Yea but the flipside is more extreme.

If bank values a piece of rock for $10m and is therefore willing to extend credit to it on that basis, does that make it worth $10m?

Aaron Sice · 21st Mar, 2012

tobe said:
Now, banks dont instruct their valuers, however many valuers are just naturally conservative, if they all took a conservative approach, it does certainly have a self fulfilling prophesy effect, with prices spiralling downwards, just as they spiraled upwards when prices were going up.

that completely goes against what i've been told and witnessed.

Ausprop · 21st Mar, 2012

Deltaberry said:
Yea but the flipside is more extreme.

If bank values a piece of rock for $10m and is therefore willing to extend credit to it on that basis, does that make it worth $10m?

if the valuer has produced sales evidence of other such rocks selling for that and the buyer and seller wish to exchange for that and the bank is willing to accept said rock for $10m as security because they are advised it can be readily sold in 30 days for that price, then clearly it is worth $10m.

Ausprop · 21st Mar, 2012

Aaron Sice said:
that completely goes against what i've been told and witnessed.

are you going to elaborate BC? have you heard/seen different instructions, or different cause and effect?

tobe · 21st Mar, 2012

I cant speak for what you have witnessed, only for what I have witnessed.

I have noticed some lenders valuations come in lower than others, (annocdotally, and not above a statistical average) but I have always been told there were no instructions given by the bank. For instance one large bank consistantly values low for new home construction on the outskirts of town, where another one of the big four pretty consistantly doesnt, in my experience.

has one been instructed? the BDM for that bank thought it might be the case, however he got into the same pickle as we did earlier, what value is it to the bank to have artificially low valuations? The most obvious outcome is just getting less business, when clients with a short val walk. They can restrict their customer and new business flow in lots of better ways than getting all of their valuations to come in short....

Bank valuations remain the property of the bank, we dont know exactly what they write in thier reports, so its hard to say why the two large banks seem to value diferently. perhaps they instruct valex a diferent way with construction loans, or for those postcodes on the outskirts of town.

As far as people being told by valuers they have been instructed by banks to undervalue, perhaps thats just a miscommunication by the valuer arguing against the general perception of value being what you might pay for something or what you think its worth as opposed to what the bank might sell it for at a mortgagee auction.

It also might just be the valuers way of shifting the blame, if they didnt say they had been instructed, they would have to argue with the homeowner, who is never wrong about the value of their house. its an easy out for them. (and onto the next one they are expected to value in 30 minutes).

tobe · 21st Mar, 2012

interestingly, when discussing this with collegues, we decided that the LVR and a couple of other factors gets passed along to the valuer. We surmised that if we instructed the valuer to value a property as a purchase, at 80% LVR would probably get a diferent result to say a refinance at 95% LVR, for the exact same security.

we havent tried this yet, but I reckon there would be a discrepancy simply because the valuer knows theres 'room' in the purchase scenario, both in equity, and the fact its an on market transaction, whereas he is probably going to look much harder in the second scenario.

Perhaps some lenders pass on more information about the details around the property than others to the valuer, and this can create a bias in the valuers report.

Token Funder · 21st Mar, 2012

Rolf Latham said:
Hope Island esp, some nice bargains

ta
rolf

Chevron as well.

Token Funder · 21st Mar, 2012

speed1000 said:
I know that is does not appear to make sense but I have spoken to 3 independent property valuers and they assure me that is what they have instructed to do. I thought it sounded unbelievable until one of my wife's work colleagues in an accounting firm got a bank valuation done a month ago on a property at Springfield lakes they bought in 2009. It was valued $40,000 less then they had purchased which confirmed what I was told was actually happening. The reason they got bank valuation done was to use the equity to buy a new car and were denied.

I, once again, call ********.

Banks do not instruct valuers to deliberately understate valuations. Were we to do so, it would just create strife and additional work as the punter jumps up and down and disputes the thing.

The reality is now, and has always been, that people overestimate the value of their property.

They look around, grabbing firmly in both hands any information that supports an optimistic view of the value, while casually disregarding anything else.

Then, they visualise in their mind's eye the perfect Spring day, their property looking as good as it ever has, a highly motivated borrower with no financial barriers sauntering past, stopping in his tracks as he in love with the very thing he had been looking for for months.

Bliss.

The offer - cash, probably - comes immediately and without negotiation. For the buyer has seen the perfect property...and it was good.

The valuer, on the other hand, works out what it is worth if you have sell it.

Honest John · 21st Mar, 2012

Can I ask a simple question? Why isn't the market value the amount the second highest bidder stopped at?

Or am I being too simplistic?

Aaron Sice · 21st Mar, 2012

Ausprop said:
are you going to elaborate BC? have you heard/seen different instructions, or different cause and effect?

short answer, no.

if people want their own facts, they can DTOR.

i wont give up my contacts to make a point on a forum.

jrc · 21st Mar, 2012

Honest John said:
Can I ask a simple question? Why isn't the market value the amount the second highest bidder stopped at?

Or am I being too simplistic?

I was told a story a few years ago of a guy who purchased a property at auction for $5000 more than the second highest bid. He was immediately struck by buyer's remorse and turned to his friend who had accompanied him and said "have I paid too much". His friend, who was a real estate agent but not involved in this sale said "Yes you have paid too much. You have paid $5000 above it's value"

Marty McDonald · 22nd Mar, 2012

Aaron Sice said:
short answer, no.

if people want their own facts, they can DTOR.

i wont give up my contacts to make a point on a forum.

I call double bull ****. I have been inderictly involved in approx 1000 valuations and all I can say is i reckon its down to the valuer opinion only. Nothing more nothing less. If bank doesn't believe in market they drop lvr's full stop.

Deltaberry · 22nd Mar, 2012

Ausprop said:
if the valuer has produced sales evidence of other such rocks selling for that and the buyer and seller wish to exchange for that and the bank is willing to accept said rock for $10m as security because they are advised it can be readily sold in 30 days for that price, then clearly it is worth $10m.

Perhaps.

But how does it sell for $10m in the first place? Because one bank suddenly decides to extend $10m credit for it?

Deltaberry · 22nd Mar, 2012

jrc said:
I was told a story a few years ago of a guy who purchased a property at auction for $5000 more than the second highest bid. He was immediately struck by buyer's remorse and turned to his friend who had accompanied him and said "have I paid too much". His friend, who was a real estate agent but not involved in this sale said "Yes you have paid too much. You have paid $5000 above it's value"

Yes but try offering the house to the other guy for $6000 less the next day. He'd probably run ASAP from you.

Negative equity on the rise

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Rolf Latham

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