The other factor behind our skyrocketing prices

Posted on October 14, 2014 by | 2 Comments
George Rousos

George Rousos Training Consultant

Apart from loose monetary policies, such as negative gearing, real estate by self-managed super fund (SMSF) and foreign investment, excessive increases in house prices is also caused by the unreliable estimates of fair market value price.

To explain in more detail, real estate sales data has its flaws due to settlement prices not being triggered from actual pre-sale valuations – which remain unchecked throughout the sale process. Furthermore, some results can be triggered from listing prices that maybe inflated by matters irrelevant to the value of the property, such as marketing fees, commissions and profits. And yet, banks continue to lend to borrowers and produce flawed valuations to protect their financial position. The system is obviously skewed towards market manipulation – which in turn has caused rapid increases in house prices and driven the house price values to levels that are economically unsustainable.

The flawed price model system is favoured heavily on the supply and demand side and through rampant speculation – instead of the properties true valuation price. ITClogoThis could easily be addressed by both investors and home buyers gaining access to a pre-sale valuation report (paid for by the seller and part of the contract) as a hedging instrument to minimise the impact of paying too much over the true value price. This would mean sales data that is relevant and dependable, while dramatically improving bank lending performance. However, an adjustment valuation for high risk loan to value ratio (LVR) lending, may still be required when the purchase price exceeds the initial valuation price. This would be a shorter version of the report in the sale contract to reflect the purchase price (the new market value price) and to verify that the purchase price was achieved through market demand, than from errors or omissions in the initial report.

As monetary policy makers look for ways to keep the housing market from overheating, it’s critically important that the Reserve Bank (RBA) and Australian Prudential Regulator Authority (APRA) address the other systemic issues of price inflation. One is the methodology used to estimate the selling price and the other concerning reliability of sale price data, but chances of it happening are only likely if the current house prices come crashing down.

What is a pre-sale valuation?

A pre-sale valuation is a comprehensive report put together by a registered valuer. It represents the market value of a property for sale (the price one is expected to get for their property and is subject to any supply and demand curve shifts during the validity period). During this process, the valuer will look at the land value/ location/aspect, building structure/improvements and condition, building/structural faults, features of the home and recent sales in the area.

For land valuation only, valuers analyse sales of both vacant land and improved properties, making adjustments for the added value of improvements. When there are unsuitable sales, a valuer will factor in other matters, such as most valuable use of the land, holding costs, taxation, constraints on use such as zoning and heritage restrictions, land size, shape and land features, such as slope and soil type, nearby development and infrastructure and views.

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2 Comments

  • Peter Mericka says:

    I always advise purchasers and vendors alike to use a sworn valuation as a starting point for price negotiations where there are serious doubts about the value of a property, particularly if the property is unusual and difficult to compare with others. The cost of an independent and soundly based valuation cannot be understated.

  • Tim O'Dwyer says:

    Agreed. The further advantage of a pre-sale valuation is when a prospective buyer make an extremely low offer. You respond by saying your sale price is based on a sworn valuation, and asking what valid basis is there for that offer.

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