In recent times, much has been said about problems associated with low levels of residential construction activity due to lack of demand and the need for planning reform in some states.
Less attention however, has been given to a further challenge confronting residential builders: valuations.
In Queensland, Master Builders Director of Housing Policy Paul Bidwell says an increasing number of new home sales are failing to settle because mortgage valuations conducted by banks are coming in below the contract price, causing difficulty on the part of home buyers in securing financing to pay for the sale.
The issue, raised at the Queensland Government’s Building Revival Forum in April 2011, continued to escalate throughout last year, particularly in South East Queensland, Bidwell says.
“This is not a new issue, but it is a story that more builders are telling as times remain tough,” Bidwell says. “It is having a significant, negative impact on new housing activity, with even the state government caught up. Should the $10,000 Building Boost Grant fail to reach its $140 million target by the end of April, one of the reasons will be that despite an abundance of willing, sellers, buyers and financiers, building contracts are failing for want of finance approval.”
Bidwell says that despite a number of positive discussions between the industry, valuers and major banks, there was no miracle cure for the problem.
He says that according to one major bank in the state, 86 per cent of valuations in Queensland are at the contract price – clearly not a problem – and a further 9 per cent are within 10 per cent of the contract price.
“We can therefore conclude that around 90 per cent of valuations are at, or close to, the contract price,” Bidwell says.
“This leaves 10 per cent of valuations causing pain for the building and construction industry,” he says. “While it is not known how many of these problem valuations are for new houses, it is fair to say that it’s the majority.”
He noted that only 10 to 15 per cent of financing approvals in the housing sector pertain to new homes with the rest pertaining to resales. Nonetheless, he said, the figures suggest a real problem for home buyers.
Bidwell says that while new housing represents the majority of business undertaken by many builders and developers, it represents only a small segment of banks’ overall lending portfolio and that problem valuations were not having a material impact on banks overall.
Why does it happen?
Bidwell says discussions with the banks have revealed a number of factors behind the problem.
One problem occurs when valuers ignore sales from the subject development and instead rely on sales of older (and lower valued) properties, a problem he says could be caused uncertainty on the part of valuers as to whether or not incentives form part of previous sales contracts on the subject development.
Then, there are problems relating to the cost of mandatory government requirements for new housing, such as six star ratings and rainwater tanks, not being fully reflected in assessments of market value.
Finally, there are several issues surrounding the instructions issued by lenders to valuers, the level of fees paid and time frames for completion, all of which have an impact on how valuers work.
Bidwell says there are several steps which the industry can take to address the problem. To eliminate valuer uncertainty regarding incentives, he says, builders and developers must adequately disclose any relevant details surrounding them. He adds that both the industry and the government need to provide adequate information to builders about the full costs and benefits associated with mandatory requirements to new housing so that the cost of these features can be properly reflected in the assessment of market value.
“We have a clear view on why the problem exists and the myriad of solutions that will go some way to fixing it,” Bidwell says.
“However, the simplest way out of this is for the market to turn for the positive, something we can only hope for”.