First time buyers – who are already suffering as capital properties increasingly sell for more than their Home Report valuation – are being further priced out the market because of substantial and often unexpected cash shortfalls.
The issue centres around the fact that lenders are constrained by the valuation in the original home report and will only lend up to this value. Where a property attracts a large amount of interest and offers the surveyor, with hindsight after a closing date, may concede that the initial valuation was conservative. However, at that point, it’s too late for the first time buyer who is stretching themselves to find a deposit.
Call for 'much-needed' consultation
In response to this growing trend, Edinburgh-based Warners Solicitors & Estate Agents is calling on industry and political influencers to begin an ‘much needed consultation’.
David Marshall, Operations Director, said: “With demand outstripping supply in the local market it is becoming increasingly common for properties to sell for more than their Home Report valuation. Often the premiums being paid are substantial and it is not unusual to see homes selling for 10 or even 20% above the valuation.
“Consider an example of a property with a valuation of £120,000 which achieves a selling price of £140,000. In this case the buyer would need to provide a deposit of around 10% of the valuation, plus the difference between the valuation and the selling price, leading to them needing a total of £32,000. That’s £18,000 more than they would need in terms of cash if they simply had to provide a deposit equating to 10% of the agreed selling price.
“While homeowners can often bridge this gap by achieving a better selling price for their existing property, for most first-time buyers the additional cash required can prove to be an insurmountable hurdle.
“This isn’t anyone’s fault. Surveyors are valuing properties based on the information available to them and lenders want to be sure that they are not lending excessively. It is a very tricky issue and implementation of new policies can often have unintended consequences – for example, it was hoped that Home Reports would constrain house price growth to help first time buyers and yet ironically, at present they seem to be making it harder than ever for them.
“Naturally the last thing anyone would wish to see is a return to excessive lending, but Home Report valuations are simply an estimate based on historic selling prices of similar homes. If a property attracts multiple offers that exceed this valuation, it is fair to say that the market has determined that the true value of the property is higher.
“For that very reason we would like to see, and take part in, an extensive consultation as to how we address this issue in a responsible and sustainable manner that will aid those who are less ‘cash-rich’ while avoiding a return to excessive lending.”
Home Report valuations often well below actual market values
David Lauder, mortgage adviser with ESPC Mortgages, agreed that the system can create problems for first time buyers: “The current situation certainly presents difficulties for those who are struggling to get onto the property ladder and unfortunately it is not an easy problem to resolve. Surveyors will assess values in large part based on historic sales, so in a rising market Home Report valuations can, in some cases, be well below the value that the market ultimately places on the property.
“One way to address this may be to give surveyors access to more detailed information on recent sales, including the number of notes of interest and value of offers that properties receive. This will allow them to more easily identify the current levels of demand at a very local level and potentially make valuations more accurate”
A recent report by Warners showed Edinburgh ‘hotspots’, Haymarket, Abbeyhill and Marchmont are seeing homes go for an average of 8.7, 7.5 and 7.3 percent, respectively, above Home Report valuations – compounding further issues for first time buyers including a housing shortfall and the general increase in house prices, above wage growth.
David Marshall added: “Recent reports show that the Edinburgh property market is doing incredibly well for sellers. But the reality is there are also some issues, and first time buyers are often at the sharp end of it.”