Unease over automated valuations

One arena of banking where cost cutting might be coming into conflict with risk management is the steady spread of automated valuation techniques as an alternative (or in some cases as a complement) to traditional methods, including the work of professional valuers.

Lending practices increasingly make use of automated valuation models that deliver a market price estimate in seconds.

Desktop valuations cover related valuation tools that usually still require some human review.

Herron Todd White - Australia's largest employer of valuers - has raised concerns about the increasing reliance on residential price modelling due to the large disparities between their valuations, and results from internal AVM testing.

"We have no philosophical objection to the electronic valuation of properties, I think that is an inevitable part of the industry, if not in the near future then certainly in the medium future," says Brendon Hulcombe, chief executive of Herron Todd White.

"Desktops seem to be what is coming out as the preferred option [over AVMs] in the United Kingdom and United States markets in terms of their accuracy.

"At present a straight AVM, in all the ones we have trialled, which I think are all the ones in the market, there just has been too great a variance to be in any way reliable on an individual property."

Hulcombe does agree that in portfolios of properties the error percentage does decrease due to volume.

"Over a portfolio of a thousand properties or more, there is an underlying assumption rightly or wrongly that it will all come out in the wash (over/under valuations will approximately even out).

"We are not just talking a five per cent error.

"In all the AVM's we have tested it has been considerably greater than that, with the RP Data valuation on my house out by over thirty-five per cent."

Hulcombe's greatest concern on electronic valuations is the underlying information fed into the models.

"The majority of data is from government sales, so they are land office sales and the data that comes through the government is poor data due to many factors.

"There are a lot of family transactions made not at the actual true property value, and with many units they have furniture packages included in the price; none of that would be disclosed.
 
"There is a big problem in Australia, particularly Queensland where there are a lot of cash kickbacks for land sales, so a contract may be $50,000 higher than the true value so the remaining blocks can be sold at an inflated price."