How changing property valuations are affecting your ability to obtain credit
Property ownership is the great Australian dream, yet it’s a dream that’s becoming increasingly more difficult to realise, with lenders tightening their credit criteria.
While no-one can argue against responsible lending, the current environment is creating a downturn in the property market. Stricter access to credit means fewer prospective buyers. Fewer prospective buyers results in less demand. If you have less demand, then hello price downturn.
If you’re seeking a mortgage for a property purchase, it’s crucial you understand how the lending environment looks at present.
We recently discussed what lenders are looking for now to rubber-stamp a credit application; however another critical aspect to property purchase today is valuations.
The lender’s valuation of a property dictates how much credit they’re willing to make available for the purchase or refinance.
And, whether you’re looking to buy or sell property for residential, commercial or investment purposes, the process and criteria around valuations is something that everyone should understand, as Distinctive Finance’s Leighton Packer explains.
Why is the role of valuations important in property purchases?
“A lot of people can get a little bit confused about the valuation that a lender places on a property. They sometimes think they’re getting the valuation done for market value purposes, but in fact, it’s for mortgagee purposes, which means it’s the bank’s security. That’s the valuation they’re going to rely upon to protect their loan. By nature, it is more conservative than what a market valuation would be.”
What’s the difference between the market valuation and the lender’s valuation?
“When it comes to market valuation and what you end up paying for a property, you’re looking at a transaction between a willing buyer and a willing seller. Sometimes, especially when it comes to residential purchases, that valuation can be influenced by emotion, too. From a mortgagee perspective, the lender is simply looking to protect their loan. If the borrower defaults and the lender needs to call in their security, they’re hoping their recent valuation stands up.”
We’ve all seen recent reports of the property market declining in Australia. What’s happening, and why?
“Property prices are on the decline, and anytime a property market has a downturn there’s usually a few factors at play, including supply and demand. But the most significant contributor to whether a property market goes up or goes down, in my opinion, relates to the accessibility of credit.
“Over recent months we’ve seen lenders tightening their credit criteria and consequently there are fewer people in a position to purchase. That results in less competition, and therefore prices take a hit.”
So what’s happening with valuations in the current climate?
“Typically, a valuer would assess the property using a sales comparable method, which essentially means finding like-for-like sales recently and comparing them to the subject property, which is the one being valued.
“If the market is on the up, valuers would look at comparable sales in the past 12 months, however in a declining market property sales from even six months ago aren’t really relevant. So valuers are ideally looking for comparable sales in the last three, even two months. When faced with this, clients often will say, ‘Well, there’s a property on the market for such and such a price down the road.’ That’s irrelevant as it hasn’t sold – unless it has sold, the valuer can’t use it for valuation purposes.”
What advice can you give to people who are looking to purchase property right now?
“Firstly, get your finance pre-approved. It sounds such a simple thing, but I’ve had countless clients trying to purchase property in the past without approval and then when it comes to exchanging on the property they find themselves losing it – and their deposit – because they can’t actually get the finance.
“Another thing is doing your due diligence and surrounding yourself with people who are experts. I’m not only talking about your finance provider, but also a conveyancing solicitor and your accountant. If you’re building a property portfolio, have you spoken to your financial planner? It’s about surrounding yourself with as much knowledge and experience that you can to minimise any surprises.”
More About Leighton
With over 10 years of experience in finance as a Private Banker, Branch Manager, Business Development Manager and Mobile Banker, Leighton brings knowledge, big picture thinking and tenacity to Distinctive Finance clients.
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