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Rising rates of devaluations do not point towards a house price crash – Hayes

by: Richard Hayes, CEO and co-founder of Mojo Mortgages
  • 01/07/2022
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Rising rates of devaluations do not point towards a house price crash – Hayes
After a property market boom over recent years, with each month bringing record price rises, faced with headwinds such as inflation, climbing energy prices and wider cost-of-living crisis, some pundits have suggested that increasing levels of down valuations could point to a crash in the near future.

It is the case that rates of down valuations – which we define as when the surveyor’s value is more than five per cent below the applicant’s purchase price – are rising.

Our own data from Mojo Mortgages and Hometrack shows that current rates of down valuations on purchases were at 12.8 per cent in April of this year. This level is up from 10.4 per cent in 2021 and double the rate seen in December 2020.


House price crash unlikely 

Whereas in 2021 the rise in down valuations could be attributed to a buoyant market with high levels of demand, at the time of writing the overall landscape has very much changed and wider concerns about the cost-of-living crisis and the war in Ukraine could be fuelling uncertainty, resulting in increased conservatism in valuation.

Many people in the property sector love to talk about devaluations as a precursor to a price crash, but this isn’t a view I take. Instead, it is much more likely to be sellers trying to take advantage of a strong market and in some cases not quite getting it right.

With certain properties, such as two and three-bedroom properties, still in such high demand, sellers may be inclined to try their luck and set a price higher than their estate agent recommends while, at the same time, some buyers are simply willing to pay more for a property because there are so few alternatives available.

The industry does not need to panic about this trend. The independent valuation is designed to identify risk and protect the lender and, during periods of uncertainty and pricing bubbles it is understandable for some conservatism to creep in. Potential challenges could arise if that conservatism is too severe and not objective of the wider market, preventing transactions from completing or not allowing homeowners to remortgage.


Valuers and transparency

First we need to understand the causes of down valuation. If customers are being too optimistic, then implementing solutions to improve expectation management on valuations, such as pre-emptive valuations like using automated valuation models (AVMs) with brokers, would be helpful. If the challenge is driven by uncertainty, then the valuers need to be more transparent about the justification behind their down valuations.

As a business we have data which tracks house price, mortgage rates and disposable income over five years. This has revealed that issues arise when the lines don’t demonstrate linear growth – right now, despite the sharp increase in house prices, the growth remains linear.

There is no doubt that the rising level of down valuations we are currently seeing needs to be addressed, for the benefit of vendors and buyers alike, but there is certainly little evidence at the moment to suggest that we are trending towards a price crash.

As long as demand continues to outstrip supply, some sellers will continue to try their luck and buyers may be desperate enough to pay over the odds for their dream property. As long as the reduced valuation remains objective and fair, the market will continue to move.

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