In a weak housing market, there are often concerns that the rate of down valuations may rise.
In fact they can be prevalent in any type of market – when house prices are flat, rising or on the decline.
What causes a down valuation?
In a rising market, exuberance, heightened emotions and expectations and a fear of missing out drives prices up as buyers get caught up in bidding-like frenzy.
There to temper over-enthusiastic offers is the surveyor or AVM who, unless the offer is supported by comparable evidence, will return a lower valuation than the bid made by the buyer.
Conversely, when uncertainty hangs over the future of the market surveyors may value too low. We saw this in the period just after the housing market lockdown in March 2020. Down valuations spiked resulting from an instinctive reaction to unprecedented circumstances.
As annual house price inflation remains negative, -0.3% according to the latest Hometrack House Price Index, and a question mark still hovers over when interest rates will fall and by how much, has there been a rise in down valuations?
Has market uncertainty caused down valuations to rise?
Down valuation is a contentious term that, when uttered, spells trouble for the success of the mortgage.
If the value goes down, the loan to value rises presenting the borrower with a tough choice; pay more every month for their mortgage or stump up a larger deposit.
We analysed weekly down valuation trends from January 2018 to March 2024 and compared them to the pre-pandemic average to uncover if rates had risen amid market uncertainty.
A down valuation occurs when a surveyor values a property by 5% or more below the applicant’s estimate. In purchase cases this happens, on average, 5% of the time. During the post-pandemic market exuberance rates started to drift up towards 10%.
Since the latter weeks of 2022, however, when the market slowed down, down valuation rates returned back to the 5% mark and have remained around that level to date.
Remortgage rates remain below average
Remortgages are a different story. Rates were steadily rising during the last half of 2023. Down valuation occurrences in remortgage transactions are more common. There’s a greater tendency to over cook the valuation among remortgaging borrowers to push down the loan to value to get a better mortgage rate or extract more equity from the property.
In fact, the pre-pandemic average of the rate of down valuations runs at 25%, much higher than for purchases where the estimated valuation has already been through several rounds of negotiation to arrive at the agreed sales price.
Although down valuation rates among remortgages are on the rise, they remain below the long-term average at around 20%.
While there may be concerns in the market that down valuation rates are on the rise, the truth behind the trends shows rates are either at, or below the pre-pandemic average.
To find out more about down valuation rates and AVM performance contact us.