REVIEW
BUY-TO-LET
Down valuations don’t equal downturn Richard Rowntree Managing director – mortgages, Paragon Bank
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any of us have a personal, vested interest in the property market, and over the past couple of years this has grown as the pandemic has prompted us to re-evaluate what is important about our homes and where they are located. This piqued interest means that property is regularly the target of speculation, and the market being as buoyant as it’s been for some time now leads to the almost inevitable question of how long the boom will last. Rising inflation and the costof-living crisis are not just widely reported but are actually 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 ‘down valuing’ properties is seen as one such clue. The thinking behind it is that lenders are increasingly willing to lend only the amount that they foresee a property being worth once the market passes its peak. Although I can see the logic behind this and recognise that there is a lot pointing to a slowdown of the market over the remainder of this year and into the 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
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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 that, 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 who 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 have 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 per cent of respondents reported increasing tenant demand – an all-time high. Alongside this, March was the first month since July 2020 when respondents to RICS’ Residential Market Survey reported an increase in landlord instructions, causing a net increase of six per cent from -21 per cent the month before. (April then 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
the anomalous pricing of properties. So we see some scenarios in which 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 sellers perceive their homes 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 in the wake of the global financial crisis. In the case of property, valuations consider 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’s highly unlikely that a valuation could be based on what a lender predicts the value of a property will 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. M I www.mortgageintroducer.com
