Start the blame game

When the real estate market was in full swing they were best of friends.  A new client would approach the bank for a loan, the bank would ring the valuers. They would barely leave the office to come up with a number, they didn’t need to see the place, it was only going to go up in value anyway. They may have been 20% out but it really didn’t matter no one ever thought that the market was going to go down.

Those were the “dream days”. I actually know valuers who changed careers during that time because they didn’t like where the industry was heading. I was told by quite a few of them that their expertise was being ignored and their clients were applying undue pressure to make sure that the valuation matched the loan products offered even when they didn’t meet reality. One day it was all going to blow up in someone’s face and they didn’t want to be there when it happened.

Well it seems that the “when” is now. As the market turns the friends are falling out. It is time to point fingers about who is to blame for the mounting losses.

The nation’s banks, financiers and mortgage insurers are pursuing property valuers for negligence claiming their inflated values triggered more than $100 million in losses in both residential and commercial property since the start of the global financial crisis.

In one example, BankWest has sued CB Richard Ellis and two of its valuers, claiming $2.1 million in damages over a commercial property in Kogarah, New South Wales; in a second case, residential mortgage backed securities provider Resimac is suing Megaw and Hogg National Valuers claiming a $258,000 loss due to a negligent valuation. The BankWest suit claims CB Richard Ellis valued the Kogarah property at $4.1 million in July 2007. It was sold in April 2010 for $1.05 million. The Resimac suit claims that Megaw and Hogg valued the Brisbane home at $850,000 in April 2007, but the lender claims it was only worth $575,000 at the time.

DLA Phillips Fox partner Lindsay Joyce, whose firm is defending CB Richard Ellis in the BankWest case, says a defence to this action will be filed this week.

Another win for self-regulation!

I can only assume that these losses have been caused by loan defaults. Without some further government intervention ( and maybe even with ) the credit and demographic environment is going to continue to put downwards pressure on the housing market. If these cases find in favour of the banks I would assume that this is just the beginning of this type of action. For the sake of the valuers I hope that the Gold Coast doesn’t start defaulting in large numbers because some of the price to sale ratios in that area are plain scary.

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  1. Yeah but … for three weeks in a row now Chris Joye has been crowing about rising clearance rates. Now we all know that Chris is horribly conflicted when it comes to matters real estate, but is he lying? Are clearance rates bouncing, and is this an indication of a recovering market?

    Auction clearance rates this year have been a little stronger than we expected, with the Sydney and Melbourne markets, which are the two major auction centres, rising above the 60% threshold again. Auction clearance rates are important because they are a very useful leading indicator. Combined with quite robust housing credit growth (printed today at +0.6% for January following a similarly healthy number in December) and evidence that lenders are loosening credit criteria, we should see capital city dwelling prices start grinding out modest gains again soon.

    • Clearance rates always rise out of January into Februaury. Joye is doing his usual data manipulation spruiking in order to talk up the market.

      Only he and the rest of the housing spruik sqaud would be celebrating banks loosening credit criteria.

      Just keep packing in the dynamite. What could possibly go wrong !!

    • He obviously doesn’t look at the RPData charts or data very closely.

      You need rising volume (i.e more fools) to make house prices go up.

      Volume is always the torque that moves markets – not clearance rates.

      Its abundantly clear that unsold stock is rising and the number of transactions is falling.

    • Yeah….but on what volumes???

      If the volumes are low, then the results don’t mean very much…

      In fact, as Chris Joye should well understand, if the volumes are “low” , then the results aren’t even statistically valid.

      Additionally, one could also argue that, in a climate where auctions are not really in general favor – as, IMHO, is the case now – then the majority of properties even getting to the auction stage are the ones that actually have a significantly above-average chance of selling at auction. What this means is that the samples in consideration are certainly no longer representative of the population (which would have been much more the case when times were “better”).

      So, Joye et al’s spruiking is based upon:

      1) what are probably at, or close to, statistically invalid volumes, and

      2) samples of clearance rates that no longer reliably represent the market at large, and in fact are likely to be massively skewed/biased in favor of properties that were more likely to succeed at auction anyway ( ie. In effect, “selection bias”).

      I’m not suggesting intellectual honesty on Joye’s part – no – but I am suggesting that he should know better, and say “One really cannot say” first, and spruik second…

      My two cents.


  2. Dodgy valuations are frequently used with the purpose of obtaining a bigger mortgage from a lender to pump up property sale prices or mortgage values ! This leaves lenders & buyers vulnerable to big losses. Ponzi property market conditions increase the incentives for valuers and property owners to engage in valuation scams. We should not overlook buyers and lenders dodgy valuations in their rush to get deals done. They should go to jail for this deceit !

    Oz House Price Crash Top Ten

    • banksters & valuers - meet lake

      Agree but would add:

      Banks are very well resourced – they should have some kind of in-house valuation system as a backup/verification.

      Would like to see any recent home-buyers and even investors join together and go the banks in a class action should RE prices decline considerably.

      The banks in turn could sue ‘their’ outsourced valuers. Valuers could ask the Labor party what to do when things go rs up.

      Win-win for buyers and the legal fraternity. Banksters and dodgy valuers can find a big lake.

      • I wouldn’t be too quick to assume that the valuations are dodgy. The annoying thing about newspaper articles like this is the lack of information given.

        There could be any number of scenarios where the 2007 valuation could be accurate based on the assumptions used and the property still sell in 2010 for much less. Especially when the property is a commercial rather than residential one.

        In saying that, if the valuers are dodgy, good riddance to them. However, I would have thought that CBs would be too worried about their reputation to earn a quick buck boosting vals.

  3. Clearance rates have increased slightly, but only due to November and December vendors lowering there price expectations. In other words they have reduced there price to get a sale. The townhouse I live in had a list price of 750K when it entered the market in November. (Glen Waverley) One interested party at around the 600k mark. The agent notified us today that is was off the market. I deal with a real estate agency in Coburg which had 24 listing in Nov/Dec the owner showed me the listings book with the progressive discounts 2 weeks ago. 5-10% less than original listing price and still no bites at these prices.

  4. Good comments,
    I think DE has mentioned this before, it isn’t just the credit growth that matters, it is the ratio of that growth compared to the number of listings. If credit is growing at .6% but listings are growing at 1% then this is a backwards step for the market.

    You really need to wait for housing finance from the abs to make a real assessment of how the credit growth is going, if refinancing is growing then I consider this a bearish sign because people are gouging their equity savings to get by. This is not a good sign no matter what the spruikers say.

    As prince said it is sales volumes that matter, but not just one month it is the trend. Take look at the sales trend for Brisbane it tells you everything you need to know, and that was before the flood

    It is the same in Canberra

  5. If you understand that unless people will be paying cash for these houses or have a huge deposit and there jobs businesses are cash cows cough cough, the bank credit based housing industy is heading for a cliff. In 1967 it took about 650 ounces of gold to buy a house in 1980 it took about 60…in 2005 it took 6-700 today it takes 350-400, lets see if she gets between 50-100 again it will be interesting.

  6. Freddie Goethe

    “more than $100 million in losses in both residential and commercial property since the start of the global financial crisis.”

    $100m over 3 years? That’s a trivial 0.01% or one ten thousandth of the residential loan book. It’s a tiny fraction of the risk element of the interest rate they built in and charged all their customers. The banks are laughing. They’ll not be looking for someone to blame – they’ll be patting themselves on their backs.

  7. Actually losses are a direct hit to return on equity, so it is not as trivial as you suggest.

    However I do agree the banks are laughing, and they will be laughing even louder if they win these cases, because they will have some nice precidence for future action.

  8. Geoff shannon

    In relation to the banks and valuations back in 2008, My company is currently in litigation against bankwest and we have found the opposite, I currently hold proof that bankwest were re valuing properties and requesting valuers to apply discounts of 20% to the valuations. I even have where as the valuer in question states it was to bullish and could only get to between 10-15% discount due to contracts in hand .
    With what I gave seen and expert advice it seems the banks were trying to manufacture defaults on clients facilities. This sane banker did this with the other two developers he had on his books and both these developers went into receivership due to breaching the LVR ratio after the discounted valuations came in , and yes all around the same month.
    Anyway it appears that the banks also have a lot to answer for . I bet bankwest won’t be taking any action against the firm that did my valuation !! As one could see this type of request as a possible collusion .