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‘Downvaluations’ don’t necessarily foretell a downturn

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The downvaluing of properties is often interpreted as a sign the market is about to experience a downturn, but this is not always the case. Our Mortgages Managing Director, Richard Rowntree, shares his thoughts.

So many of us have a personal, vested interest in the property market and over the past couple of years this has grown as the pandemic prompted us to re-evaluate what is important about our homes and where they’re located.

This piqued interest means that property is regularly the source of speculation and the market being as buoyant as it has been for some time now, leads to the almost inevitable question of how long the boom will last. 

Rising inflation and the cost-of-living crisis is not just widely reported, but also being felt by us all at the petrol pumps and when we pay for our groceries and utility bills. This is adding to the sense that the economy cannot sustain such growth in property prices, and it seems that people are looking for clues that the bubble is about to burst.

Surveyors ‘downvaluing’ properties is seen as one such clue, with the thinking that lenders are only willing to lend the amount that they foresee a property being worth when the market passes its peak.

Although I can see the logic behind this and recognise that there is lots pointing to a slowdown of the market over the remainder of the year and into next, it could be argued that artificially elevated prices are actually a sign of the market’s ongoing momentum, which is enough to sustain the sector for the foreseeable future.

To understand why this may be the case, we must note the differences between estimated and market-tested property values.

Over the past two years, and maybe even before if we think about the impact of Brexit, the property market has been subject to some novel influences.

The race for space has meant that the right properties, particularly those with outdoor space located commutable distances from major cities, are much more desirable to buyers than they may have been previously or if they were located somewhere else.

With buyers relocating to areas where they get more for their money, we see some that may be willing to pay more than a local would. And the relocators are not just willing, they’re also able because property prices rising at the fastest rate in over a decade has left some enjoying substantial amounts of equity.

Another key driver of properties receiving unrealistic estimated valuations is the fierce competition for homes resulting from prolonged high tenant demand combined with a severe shortage of stock available to buy.

In a survey of landlords carried out on behalf of Paragon, 62% of respondents reported increasing tenant demand, an all-time high. Alongside this, March was the first month since July 2020 where respondents to RICS’ Residential Market Survey reported an increase in landlord instructions, causing a net increase of +6% from -21% the month before, before April saw a decrease in new listings.

This competition has resulted in a rise in sealed bids, which are often over market values and further add to anomalous pricing of properties.

So, we see some scenarios where buyers may well be willing and able to pay more for a particular home than the broader market value and we also have to take into account how much the seller perceives their home to be worth. If we own an asset, we tend to put a higher price on it than we would be prepared to pay someone else for it.

While it’s often said that the value of something is whatever someone is willing to pay for it, true for many goods and services, it’s not the case with mortgage borrowing. Lenders have a responsibility to protect their businesses and their borrowers, and mortgage lending regulations have become much more stringent following the Global Financial Crisis.

In the case of property, valuations are undertaken considering a number of factors and surveyors are subject to standards set by the Royal Institute of Chartered Surveyors. This means that values have to be evidenced so it is highly unlikely that a valuation could be based on what a lender predicts the value to be in the event of a downturn. Instead, valuations reflect how much the property is worth when it is valued.

In the rental market, we also consider the potential to generate income when assessing affordability. This means that an HMO located close to a university, for example, could have a significantly higher value than an almost identical property found in an ordinary suburb with no real demand from local students. 

Of course, in business success can be gained by looking at the range of factors influencing a market and forecasting how this may change in future, but in the case of buy-to-let it is important to look at the long-term, fundamental drivers of demand. 

Societal changes like a growing population and an increase in the number of single person households, along with a decades-long deficit in the number of social homes needed to meet demand, mean that demand for rented homes will continue for years to come, even if not at the level we’ve seen of late.


Richard Rowntree

Richard Rowntree
Managing Director for Mortgages


This article was first published in Mortgage Introducer

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551