The Logic of a Cyclical Adjustment on Valuation: Some Reflexions

Abstract

During the global financial crisis, many voices in Europe rose up blaming a deficient valuation of properties that would have artificially increased prices, thus generating greater risk in the financial system by overvaluing mortgage collateral (French and Gabrielli, Pricingtomarket. J Prop Invest Finan 36(4),391–396, 2018). The result of this criticism was a strong pressure on appraisers to ‘adjust’ their valuations to the ‘real’ market value, when it was also known that, before the outbreak of the crisis, the interests of the agents were just the opposite. In both cases, it was left to the appraiser’s ethical decision to fix the most probable value, compromising its credibility attached to the direction taken by the market. This anecdote, which has been repeated every time the real estate market has experienced a serious crisis (there are two previous crises that occurred in Europe since 1973 with similar claims), is an example of the difficulty of adjusting real estate values in periods of convulsion of their mechanisms, of the anchorage that valuation systems have to the evolution of market prices as well as of the distance from reality that they would have if they were only valued with technical systems. Therefore, in many regulations and valuation techniques recognized by institutions (IVS, RICS, TEGOVA and Appraisal Institute, among others), the recommendation is to perform calculations with more than one technique. On the other hand, the reaction to a fall in values is asymmetric with that which occurs when values increase excessively (appraisers seem to be penalized during falling prices periods but not when they grow), which shows a certain tendency to prioritize business interests in what it should be an objective valuation of any property.