Sometimes the Australian way is better. Our banking system is remarkably similar to Australia's, largely because our big banks are owned by Australia' banks and because banks on both sides of the Tasman have lent heavily to home occupiers and investors. But there is one big difference. Australia's banks will only accept a property valuation from a valuer that the bank specifies and pays for. The bank in Australia will choose a valuer from its own panel of valuation companies before it approves the loan. The cost of the valuation is often passed on to the borrower, but the relationship is clearly between the bank and the valuer.
The valuer will often be conservative about the value of a property because any over-valuation will eventually hurt the bank, which has put most of the money up for the deal. The key thing is that the bank is the valuer's client, not the home buyer. In New Zealand the shoe is definitely on the other foot. Here the borrower chooses the valuer, not the bank. Often the borrower will choose the valuer recommended by the real estate agent during the sales process. This means the valuer feels beholden to the home buyer first, and often to the real estate agent next. The bank is an adversary rather than a client. The bank has virtually no come-back if it suddenly finds the property is worth much less than the valuation. In the last 5 years it has been in the valuer's interest to provide an optimistic valuation because that meant the borrower could get a loan more easily and the deal would go through more easily. All this is fine in a rising market. The rising tide will cover all sorts of mistakes and optimism. In a falling market this is problem for the bank, and by extension, the depositors in those banks who want to be sure the banks are being careful with their money. New Zealand's valuers are mostly small operators operating as one-man bands or as small practices out of home offices and suburban office buildings. They would, of course, reject the implication that they are pumping up valuations to ensure they keep a cosy relationship with a real estate agent or property investor. But it's not unheard of, particularly in the area of investment apartments and the practice of same day selling, where a property is bought and sold by some middleman with a friendly valuer and a gullible end purchaser. The Blue Peak scheme operated in conjunction with Phil Jones' Richmastery property investing education group comes to mind. An Auckland valuer, Tony Kidd of PRP Auckland, was taken to the Valuers Registration Board earlier this year over complaints about valuations on apartments. PRP did valuations for hundreds of Blue Chip properties, many of which were hopelessly unreal. Many of the instances of mortgage fraud reported on earlier this year involved "˜hydraulicking' using friendly valuations. Eventually our banks will end up with the problems when mortgagee sales reveal assets worth much less than originally valued. New Zealand's banks should adopt the practice of their Australian parents and appoint panels of valuers they can monitor and hold to account.