The researchers analysed 694 Dutch home sales, comparing the agreed purchase prices with the valuations submitted to mortgage lenders. They found a strong relationship between the two: rather than providing an independent estimate, valuations often appear to reflect the price buyers have already agreed to pay.

40% of valuations match transaction price

In just over one in five cases (21.3%), the appraisal and sale price were exactly the same. But since valuations are usually rounded to the nearest €5,000, the researchers also examined how many fell within this margin. On that basis, 41.5% of appraisals effectively matched the transaction price. The researchers also used a statistical model to estimate what each property might be worth based on its characteristics and wider market conditions, without using either the agreed sale price or the appraisal. They found strong statistical evidence that appraisals tracked the agreed sale price more closely than would be expected if they were formed independently of it.

When a valuation follows the agreed sale price too closely, both the buyer and the bank may be taking on more risk than they realise. If the borrower defaults, the property may not fetch enough to cover the outstanding mortgage, leaving a residual debt. This risk can remain hidden while house prices are rising, but a cooling market, as recently reported in the Netherlands, can see the risk begin to grow.

‘An independent valuation should tell you what a property is likely to be worth, not simply confirm what someone has already agreed to pay for it,’ says De Punder.

The study draws on properties for which appraisal reports were obtained through mortgage advisory firm Viisi. The findings therefore do not establish how all Dutch appraisers work, but they point to a potentially significant weakness in the valuation process.

Conflict of interests

An appraisal plays an important role in mortgage lending: it helps the bank determine whether the property provides sufficient security for the loan. But the parties involved in a sale may all benefit from a valuation that supports the agreed price. Buyers want to secure their mortgage, sellers want the sale to go through, and lenders have a commercial interest in granting loans.

This creates a risk that valuations become less independent, even without any deliberate wrongdoing by individual appraisers.

The consequences can become apparent when house prices fall. If a property has been valued too highly, the bank may have less security than it believes. Should the borrower default and the property sell for less than the outstanding mortgage, a shortfall can remain.

More independent checks

The researchers argue that the independence of property valuations needs strengthening. One option is to make greater use of statistical valuation models, which estimate a property's value using information about comparable homes and other market data. Such models could provide an independent check on an appraiser's assessment.

The researchers suggest that more transparent and independently tested valuation methods could help lenders assess the risks they are taking on – and help ensure that a property's valuation reflects its likely market value, rather than simply the price agreed between buyer and seller.

‘Statistical models can offer a useful counterweight to the incentives surrounding a property transaction,’ says De Punder. ‘The aim is not necessarily to replace appraisers, but to make sure that valuations provide a genuinely independent assessment.’