The Australian Prudential Regulation Authority (APRA) today released the results of its surveys on the property valuation practices used by authorised deposit-taking institutions (ADIs) and lenders mortgage insurers (LMIs) as part of their mortgage and insurance approval processes.

The surveys, undertaken in the last quarter of 2004, aimed to:

• understand current industry practices in order to identify whether there is any trend towards the use of less rigorous valuation methodologies that might have a significant impact on the financial viability of ADIs and LMIs if there were to be a major property market downturn;
• understand the interactions in valuation practices between ADIs and LMIs;
• consider whether there has been any material relaxation in valuation practices; and
• identify areas where ADIs and LMIs might improve their risk management practices.

The main conclusion of the surveys is that there has been a movement away from the traditional reliance on a full external valuation of a property (involving an internal inspection) in favour of more streamlined valuation methodologies, particularly by the larger ADIs.

APRA Chairman, Dr John Laker, said that these new methodologies had not been tested in a major property market downturn and they may expose lenders to increased credit risk if appropriate controls are not in place.

“Good practice, in APRA’s view, would see these new techniques limited to lower risk lending, where there is benefit to the lender in reducing valuation costs without significantly adding to risk”, he said. “In addition, it is important that alternative methodologies have been appropriately researched and approved at senior levels, with a suitable level of subsequent back‑testing.”

Dr Laker added: “The surveys confirmed a number of strengths in current property valuation practices, but also identified some areas of weakness, which APRA is taking up with the institutions concerned.”

A copy of APRA’s report is located on APRA’s web site.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.APRA currently supervises institutions holding approximately $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.