How Should Residential Property Be Valued?
In the past couple of weeks I have received a number of emails from distressed sellers who are complaining that valuations given by estate agents on their homes are not being realised in sales and they are left feeling dejected after their homes have been on the market for over 12 months.
The home sellers are refusing to take offers that are slightly lower than the asking price because they believe the estate agents have factored in recent house price drops into their valuations and of course they are telling them the housing market is recovering.
So why are the houses remaining on the market for over 12 months?
Well most valuations given by estate agents are based on a small drop from 2007 peak (Up to 30%) when the floodgates to credit were wide open.
In 2007 you could get a 125% mortgage with no deposit and very little in the way of proof that you could pay it back but now the floodgates have been well and truly shut and the credit tap turned off..
Estate agents are still valuing houses as though there is some magical credit supply about to turn back on, which is not going to happen anytime soon. Actually once quantitative easing has run its course the and the banks have run back to the guilt (spelling is intentional) auctions and their vaults once again look empty then the credit supply will tighten even further.
So how should estate agents value houses to regain reasonable turnover of properties?
Estate agents should look at the average wage in their locality and then work out what kind of deposit is achievable given that you need a 40% to gain a decent mortgage rate that disincentives renting in the given area.
The deposit should be based on savings of disposable income and not from the bank of Mum and Dad which is both morally questionable and unsustainable as a source for deposits given the current economic climate.
It is not good enough waiting and hoping that some cash rich buyer from outside the area is going to walk through the estate agency doors waving a huge wad of cash every couple of weeks, a sustainable stream of completions is required to keep business afloat and keep sellers happy.
The question that keeps coming up is "A house should be valued at market value" and that is correct but when a market has nearly all but broken down market value should be based on what buyers in that vicinity can afford.