New Build Sales Blocked By Low Valuations

(Telegraph) – THE NEW BUILD VALUATION DEBATE has reared its head again this week, with housebuilders warning that mortgage valuations are a major stumbling block in sales. Barratt said it had been forced to turn away sales after valuations came in too low amid extreme bank caution over lending.

The Sunday Telegraph Money section first revealed the plight of new builds two years ago. They told the story of a Barratt development in Britain’s oldest recorded town, Colchester, and how many properties had been repossessed and were under the hammer at knock-down prices. The flats at Henry Laver Court, which sold, with incentives, for between £224,995 and £249,995, had reserve prices at the auction of around £140,000.

One of the issues with new-build properties is valuation, and there have been concerns in the past that they were overcooked. Such concerns were first raised three years ago by the Council of Mortgage Lenders (CML). It argued that incentives used to attract buyers were muddying the water on valuations.

The stigma of new-build valuations saw lenders tightening their lending criteria on new builds, with some refusing to lend full stop —  irrespective of how much money buyers could afford to put down as a deposit.

Even the Royal Institution of Chartered Surveyors (RICS) conceded that the valuation of new builds could ‘pose difficulties for valuers, especially when there is limited comparable evidence available or when buyers have been offered incentives.’ It rewrote its Red Book, which gives valuers guidance, to warn surveyors that ‘developers may offer incentives on new properties, and occasionally on non new-build property, in order to achieve quicker sales and give the appearance of high sale prices.’

Redrow said the ‘widespread practice of downvaluation by surveyors representing mortgage lenders’ posed a ‘major obstacle to the recovery of the housing market.’ Having agreed on a price with the prospective buyer, Redrow said deals are being undermined when surveyors, representing lenders, value the homes at less than the asking price.

It is easy to see why a conservative valuation can wreak havoc with a potential sale. If a price of £120,000 has been agreed for a flat, a buyer seeking an 80% mortgage should be able to borrow £96,000; but, if a surveyor values the property at £100,000, the buyer will only be able to borrow £80,000. The buyer will then need a deposit of £40,000 instead of £24,000.

Housebuilders, along with everyone else, jumped on the property bandwagon and actively encouraged a wave of budding buy-to-let tycoons with juicy incentives such as paying their rent for two years. Such incentives were still dangled after it emerged that the values of flats, mainly in city centres, had started to plummet. In October 2007, for instance, new builds were being promoted heavily under the tag-line ‘Why England’s second city should be your first choice for investment’ — despite reports that the property market in Birmingham was being hit.

Lenders have suffered bigger losses with new builds than traditional properties and, understandably, now take a developer’s own, seemingly generous valuations, with a pinch of salt. But housebuilders only have themselves to blame — they created a rod for their own back.