Valuation – First House
In these difficult moments for the real-estate industry, the valuation prefession confronts a new challenge generated by the program „First House”.
In our opinion, the governmental program, with a strong social character, will have an insignificant economic impact mainly due to its dimension and the narrow segment of eligible persons to which is addressed. Taking in consideration the type of residential properties that are going to be valued, it should take into account all the three approaches.
If properties in development are acquired, the cost approach should take into consideration the descending prices of the land, construction materials and labour. Another element that should not be neglected is the significant adjustment of the developer’s profit, which got at a level in concordance with the new market conjuncture.
The income approach has to take into consideration the strong descending evolution of rent from the last period and the fact that outside the well developed cities and the university centres there is no sustainable rent market. The pronounced demographic decrease, the emigration and the large percentage of Romanian house owners are direct causes of this phenomenon.
With respect to the selling comparison approach which is the most suitable for the valuation of finalized and ready to use properties when the market is active, both the valuator and the financing consultant will have to take into consideration the following:
- The market segment accessible for the “First House” was influenced by this program, bringing a 15% increase on the selling prices, because for now, the program implies low financial costs (Euribor will not remain at this level in the long run).
- The location and the intrinsic quality of the property can retain the value in the long term; therefore these have to be carefully analysed.
- Even if the loan is guaranteed by the state, it shouldn’t be neglected the nature of bank guarantee, with all the inherent risks.
One solution to this problem could be for the real-estate consultants and banks to promote the mortgage landing value (MLV) as it is provided by the 2006/48/EC Directive of the European Parliament and agreed by the European Federation of Mortgage Banks (EMF).
In essence, this approach is based on a prudent estimation of future selling of the property which takes into account the sustainability aspects on the long term, the normal and local market conditions, adequate current or alternative exploitation, without taking into consideration speculative aspects.
A conclusion that should be drawn from this real-estate crisis and this program is that in the future the market (the consumer) will prioritize the quality of the property and not the financing conditions (almost standardized in the “First House” program). In the long run, the standardization of the financing conditions is going to increase due to the consolidation and development of the local financial institutions, the increased regulation and the improvement and the application of the European legislation concerning consumer safety.
Even if today the ones that qualify for this program benefit in comparison with the ones that took loans in previous years, the credit risk is significantly high, even though in this case the deficiency of the guarantee are taken by the state.
To draw a conclusion on this, although this is how the program First House should be lead, in reality the evaluation brings up the same value found in the pre-contract signed by both parties. So no standards or professionalism are really required (sic!).
Adrian Crivii, FRICS, MAA