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I have not taken out a resi mortgage for about 10 years so lacking in the knowledge on some aspects that need clarifying.
a) I assume the surveyor will value for a resi purchase value or purchase price which ever is lower?
b) If lending mutiples are x 4 your annual salary and you earn 25k pa, so you can borrow 100k: you see a 100k (and worth 100k) property so you borrow price of property - deposit ie 90k (as max is 100k) and put 10k deposit, if another buyer likes this property and is earning 35k per year so he can effectively borrow 35k x 4 = 140k, does the surveyor value this property at 140k lending 90% of 140k ie 126k or value it based on comps ie 90% of 100k which means this higher income buyer would need to put in 50k?
What would be the point then if he can borrow 126k based on his earning?
c) I'm just thinking in a rising market do surveyors value differently based on effectively how much you can pay for the property ie 140k in the above example?
d) When lending effectively comes back, we will see house price rise: if surveyors value based on how much you can borrow its no doubt we will see price growth, but if they still value based on comps even though you can pay more the loan will be the same but just means you will pay a higher deposit like the 50k in point b:
so how will easier credit mean house prices will rise?
Thx in advance if I'm missing the obvious.
Cheers Tam for your answer.
I'm actually looking for specifics to the above.
thomas gallagher said:
hi i think that when lenders start to lend again then more people will qualify for a mort and be in a position to buy, therefore there will be more buyers than sellers so competition will drive up prices basic supply and demand, of course this also depends on a strong economy high employment etc cheers, tam
For what its worth, here is my take on your points;
a) a surveyor will do what he or she is supposed to do and value the property. If it is a residential property they will obtain comparables of for sale/sold properties of similar properties in the area, they will do their homework (usually), and then provide a value. If they are instructed by a lender (for mortgage purposes) they are acting for the lender and will confirm whether the property is good security for the loan which the buyer (or current owner remortgaging) is applying for.
b) im not sure I fully understand your point. Just because someone has a higher income and therefore can afford to purchase more expensive properties, does not mean that a valuer will "up the value" of a property because of it. The valuer will as in (a) above, simply do their job and value the property. They are not interested in what the person earns or can afford, they are interested in what the value is. sorry if that sounds obvious.
c) a valuer will value a property after doing all their own due diligence which clearly takes account of the local market at the time when the valuation is carried out.
d) house prices are made up of a multitude of factors and are not necessarily based on "lending returning" as you put it. There are too many factors to list comprehensively, but interest rates, lending criteria, unemployment levels, general economy, public confidence in house prices are some of the bigger factors. if all these things are in the right mix, house prices can start to rise and lenders may then have a more relaxed view on lending which means more people can obtain credit which means there are more potential buyers for properties, which in turn further pushes prices up - a simple case of supply and demand. However, as mentioned, its far too difficult to analyse with any degree of certainty.
Hopefully some of that helps.
Thank you for your input
What I meant by the above point (b) was, I thought if someone can payhigher, they would value based on your purchasing your power and lift upproperty prices.
As you said they will base it on the comparable value, so anyone who wants to pay more would need totherefore put in a higher deposit ie like 50k in my above example?
Let me paint you a picture: we live in a ideal world where interest ratesare low (like now) low unemployment rate, the public are confident inhouse prices, and lenders are pretty much lending to the majority.
Lets say, for illustration purposes most 3 beds properties in this given area/town is worth 100k.
What key point would lead into this 100k property rising? (I know you said there are many factors)
So ...the majority can get finance and have a 10% deposit for arguments sake.
So for that property to exceed the 100k point, would mean the surveyorwould value a similar comp at 100k: they would lend 90k meaning youwould need a 10k deposit.
If there was another party interested, and you knew you could pay more, the valuer would still lend90k but you would pay a bigger deposit [the difference] say 30k, if youoffered and bought at 120k.
So this property is now sold at 120k.
The surveyor comes out and feels confident, and values a similar prop for 120k now meaning the buyer would get 90% of 120k.
After all that (phew) my question is for a buyer to break the mould betweenthey existing value and a higher price they can pay, is, they willalways need to put in a bigger deposit[borrowed or saved], so survyeorswill value based on that so prices rise?
Sorry if this is obviouis, but lending to more people on the face of it does not lead to increasedhouse prices unless buyers can put in a higher deposit which then pushesup prices.
The value of the thing is based on the value of the thing independent of how someone might buy it. If there is a cash buyer and a buyer looking to borrower secured by the asset, the value of the asset will not change.
The valuation will be based on comparable sales that are similar, recent and broadly the same. The logic being a rational buyer will switch to another property if one is over priced. The lender wants to know what they can get for the place if there was a default on the loan so they want to start by finding out what the place is worth in the current market.
If the valuer thinks the market is falling so the past sales are not a perfect representation of the current value, adjustments will be made. This has nothing to do with the borrower's ability to pay.
In most situations you should assume the valuer never sees the buyers credit and ability to pay. If they never see the info they cannot make a determination of what the buyer can afford. It is outside of their remit and definitely something that does not change what the market thinks the property is worth.
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Above understood, as well as Lee's comments which reinforces just because someone has a higher income and therefore can afford to purchase more expensive properties, does not mean that a valuer will "upthe value" of a property because of it.
However, the only reason the thread was promoted was because I have read a few of AA books which I got cheaply from amazon, and he states higher income mutiples given by lenders allows first time buyers to borrow in excess of the real value of the property causing property prices to rise.
He gives an example:
Property worth 100,000
The only way this property to rise and to be pushed beyond the 100k mark is by having other owner occupiers joining together to increase their buying power/by higher income multiple lenders.
So if you had two owner occupiers deciding to buy togther, both on same salary and deposit their combined buying power wouild be (on a 2.75 joint salary): £10,000 + £10,000 + (2.75 x £40,000) = £130,000
The property's value has risen to what a couple is willing to pay for it'.
So coming back to the original question, how can a higher income buyer push the value up BASED on their income from 100k to 130k?
Who is right?
Who is AA?
The logic is not really complete.
The value of the property is what someone will pay for it. If you make credit more readily available people can afford to spend more so the assets that they purchase are in higher demand. That will tend to cause the supply to increase or the prices to rise to close the gap in supply vs. demand.
AA's point is a bit chicken and egg.
If you follow AA's logic and there is something to be said for the point of view, lower interest rates will increase what people can afford to spend. That is why I say that interest rates matter in terms of determining what someone can afford to borrow. When interest rates are 3% they can afford a specific amount monthly. When interest rates are 15% they can afford to borrow a lot less. This really means that the income multiple method is seriously flawed if it is used to determine what a person can afford to borrow. The income multiple model assumes interest rates do not matter.
Sorry it was ajay ahuja, you may have heard of him: bad rep but written a number of books.
Ok -so ignoring whether you have a high income mutiple which will not increase the value of a property.
Lets imagine a property is worth 100k- and you can get a 90% ltv ie 90k (assuming you can afford it as interest rate is low and not high making the monthly amount affordable)
and you offer 100k as value is 100k.
If another person, lets call him B, also likes the property and offers 130k as the surveyor has valued it at 100k, the LTV will be 90k (90%) and person B will need to put in a higher ie 40k deposit.
So the question is, is this how house prices increase, when another party will initially have to start off the bidding war and pay a higher deposit on existing values, so when the property is sold at 130k, this is the 'value' and if others follow suit and pay the same higher deposit for similar props, values will be 130k?
We are not talking about math where once a proof is established it remains correct until the end of time.
Value is what someone will pay where the transaction is an arm's length transaction with no incentives, inducements or other reasons to under or over pay.
If a buyer pays more than the asking price, was the asking price too low or has the market risen? If prices rise over time does that mean the assets are more valuable or the currency has lost its buying power (classic inflation)?
A valuation from a professional is an opinion or educated guess based on a standard methodology. The number can be high or low by about 10% and still be considered accurate. The valuation the lender is asking for is not to determine the absolute price under all conditions as much as a way to see if the value will be sufficient to protect the lender's position.
If there is more than one property available on the market with broadly similar features, there is no reason a buyer would pay £130K if the others are being offered for £100K. In the cases where a buyer does want to pay the premium, there will be other factors that make that specific property more valuable to the buyer than the others being offered for £100K. Maybe the buyer is a developer who needs a right of way to a larger plot behind the subject property. Or maybe the neighbor wants the house next door for family reasons. In those cases the price paid is fair as the value to the buyer is more than just the house.
If someone did pay £130K for a property that is worth £100K the lender will base the LTV calculation on the lower figure. As you noted they buyer would end up with a larger deposit than they might have expected. The lender is not making a comment on the price being paid, they are making a statement about what they will lender secured by the property. In this case you could say there was more than one figure for the value. There is the value the buyer is willing to pay and there is the value the lender is willing to accept when securing the loan. There is no absolute way to say that either is more correct.
I like to use the example of a 500ml bottle of Diet Coke. You can check multiple vendors in a large venue and it is likely you will find different prices. For most people they will pay what ever is being charged at the vendor's counter if they are buying other things at the same time. Assuming the other items are unique to a specific vendor the customer pays the price for the Diet Coke rather than conduct two transactions. Is the Diet Coke valued at £0.99, £1.00, £1.10 or £1.20? Does it matter? If so, who does it matter to?