The Importance of Property Valuation

Recently, Hong Kong's secondary property prices have been falling, while new developments are being offered at attractive low prices. For those looking to buy, it might seem like a great time to snag a bargain. However, many buyers overlook the importance of property valuation. 

What exactly is a bank valuation? Property valuation is an assessment conducted by a surveyor to estimate the value of a specific property, which is a crucial indicator for banks when issuing mortgages. Generally, surveyors use the following methods for property valuation: 

The most common method is the comparative approach, also known as the direct comparison method or market method. This involves comparing the property with similar properties that have been sold near the valuation date, making appropriate adjustments and analyses to determine the property’s fair market value.

Another method is the investment approach, which values the property based on the rental income it can generate and the expected market return rate. The third method is the cost approach, which estimates the cost to rebuild the property on the valuation date, including land value, construction costs, and interest, then deducts depreciation to calculate the property’s value.

It’s important to note that surveyors base their calculations on transaction prices published by the Land Registry, which typically have about a one-month lag. This means that the valuation reflects market conditions from a month ago and may not accurately represent the current market situation.

Since property valuation is a risk management measure, banks will not lend more than the property’s appraised value. If the valuation is lower than the purchase price, resulting in an insufficient mortgage loan amount, the buyer will need to pay a larger down payment.

For example, if you purchase a unit for HK$8 million and the bank values it at HK$7.2 million, applying for an 80% mortgage would be based on the valuation, allowing a maximum loan of HK$7.2 million x 80%, or HK$5.76 million. Consequently, the down payment increases from the initial HK$1.6 million to HK$2.24 million, requiring the buyer to pay an additional HK$640,000, or risk forfeiting the deposit.

Generally, if the transaction price and valuation are similar, banks will use the transaction price for mortgage calculations. However, buyers can use a lower valuation as a negotiation point to persuade the seller to reduce the price.

The above examples illustrate the critical importance of valuation. Before signing a contract, remember to check the valuation. The simplest way is to use online valuation tools on various bank websites. If the valuation shows "not applicable" or is significantly lower than the market price, the unit might have issues such as being a stigmatized property or having nearby problematic units. It's best to ask the owner or agent about the property's background before deciding to proceed.

Conversely, an unexpectedly high bank valuation isn’t always a good thing. If the transaction price is significantly lower than the bank’s valuation by 10% to 20% or more, the bank might refuse the mortgage due to concerns about tax avoidance or evasion by the buyer and seller. 

For more 28hse real estate information

28hse - No.1 HK Property Portal Squarefoot - HK Premium Property Portal