Their use is set to grow further as lenders look to increase volumes, particularly through new digital channels, improve the customer experience and adapt their cost base to an increasingly competitive market.
Initially used to deliver accurate and cost effective valuations for remortgages and further advances, the application of AVM technology has expanded into auditing of physical valuations and valuing portfolios. While many doubts were raised initially about their use, real world experience has shown that a computer model can deliver accurate valuations and maintain performance over a housing cycle.
The growth in the AVM market should not be confused with greater availability of housing market data and information which is useful for surveyors conducting physical valuations. A surveyor using tools to select relevant comparable evidence and arrive at a valuation is not an AVM, even if algorithms are used to compute the value from the user’s comparables. AVMs deliver a market value with no human input after the point of initiation hence they are directly connected to mortgage application systems and, like a credit score, sit within the lending decision making process.
One of the key drivers of AVM take-up has been the ability of lenders to test, independently verify and track output over time. Predictable and consistent outputs are essential to underpin confidence in using AVMs where performance between individual AVMs varies in real-world application.
Market transformation
Looking ahead we believe that the wider market for residential valuations, and the use of AVMs, will continue to transform the mortgage market, driven by a range of market factors. A move from ‘borrower pays’ to ‘lender pays’ for purchase cases and customer demand for ‘frictionless’ loan applications processing via digital channels are structural trends which change the landscape for valuations. This combines with a series of ongoing challenges within the valuation industry, as reported in last year’s independent RICS valuation commission chaired by Dr Oonagh McDonald.
AVMs for mortgage origination have the capacity to be used in a greater proportion of remortgage and further advance cases, supporting an uplift in lending volumes as the economy grows and house price growth reduces loan to value ratios. The use of AVMs to replace physical valuations in purchase cases began in 2014 and will continue to grow, adding to their existing use for audit in the effective identification of potential over-valuation prior to the loans being approved.
The greater use of technology and analytics to support lenders’ growing mortgage volumes while managing risk is not limited to the use of AVMs for origination. There are a range of emerging analytical services that help lenders to better assess collateral at origination and across existing portfolios.
Just over a decade after the first major lender started to use AVMs, this technology has delivered a step change within the UK mortgage business, and operates quietly and effectively behind the scenes every day. The next chapter for AVMs is most likely to be about enabling even greater efficiency in mortgage decisions as lenders tap the vast potential of the digital channel and yet at the same time facilitate the ever increasing regulatory demands for active risk management.
