The news came from the Royal Institution of Chartered Surveyors (RICS) which has been at the centre of the mortgage-specific element of this tumultuous time and I am pleased to say the news was good.
It is easy to miss the importance of the announcement with so much going on, but when RICS changes its stance, it affects the entire industry, from borrowers through to those investing in securitised mortgage debt.
Its influence is significant but rarely discussed.
Huge caveat
We all remember the chaos following the cessation of physical valuations and their return was a cause to be celebrated. That return was heavily caveated.
There were calls to freeze house price indexes and few recent transactions even to compare. The return to valuations was vital but involved huge uncertainty.
Pricing property in any crisis is difficult, but this crisis is unlike any other.
The response from RICS was to implement a material uncertainty clause on all valuations. That is huge.
If lenders were not already uncertain about the outlook of the economy, here was RICS telling them that the asset base was also subject to similar but current uncertainty.
The impact of this was overwhelmingly positive as it allowed surveyors to value property without looking over their shoulder; this clearly prevented many inevitable down valuations.
Lenders reacted accordingly and reduced their loan to values (LTVs) to account for the increased risk.
As much as people have berated lenders for reducing LTVs, frankly, who can blame them with material uncertainty on valuations and a potential economic crisis looming.
Only the margin-hungry have taken the plunge, but expect those margin hunters to increase in number following last week’s announcement, though this will in no means lead to a return to pre-Covid conditions.
Policy Change
So last week RICS announced the material uncertainty clause would be removed for most valuations.
That is every bit as significant as it sounds and great news for the industry.
Lending is all about risk: the RICS policy change reduced one of those risks significantly. Valuations are now based on an unrestricted market environment with reasonable levels of recent transaction comparables, all valuations that were supported by the prior RICS policy.
Lending risk has just fallen, and that is hugely significant, but this policy change does not remove the uncertainty surrounding the future of the housing market, the future of employment and the economy as a whole.
We can expect an improvement in the risk appetite from lenders following this announcement but these improvements will only come from those that were already considering lending at higher LTVs thanks to the high margins available in that sector.
Recovering from this crisis will take some time and there are many obstacles to overcome yet but thankfully, RICS has just removed a rather significant one.
