Free markets, or indeed markets in general, have a tendency to set prices, not through control, not by one person holding up a placard and shouting from the rooftops, but rather through the process of prices reaching a point at where they occur, where demand and supply are reacting with each other.

So if you look for €3 million for a three bed semi in Donnycarney your property will not sell, no matter how much you want it to. At the same time, if you were to list a property there for €50,000 it would sell overnight, and both of these extremes demonstrate a pricing being totally out of balance with the market. The interesting point now though is this: The market itself doesn’t know what is happening, so valuations are currently meaningless. By that I mean the people who go out and value property are not able to make accurate assumptions about property prices in this market, we are seeing this daily, and then dealing with the end result which is collapsing mortgage deals.

This happens when a person signs a contract for a property on the basis of having a loan offer, but then when they want to close the sale the valuer decides the property is worth less. We covered this before in a post about the ‘contract valuation trap’. The issue we have isn’t that we doubt property prices are falling, the issue is that the bank are stringently applying their LTV restrictions at a time when the buyer is locked into an unconditional contract to buy!

Should the value of a property be determined by what somebody is willing to pay for it or upon what a valuer says? For instance, if a valuer said the property was worth twice as much then would the bank be offering better rates based on LTV and waive the need for any deposit (effectively give 100% finance)? Is a buyer any more likely to default based on a valuation coming in low? No, the ability to repay is gauged on credit criteria, not on LTV criteria, and in fact, the banks position is -in some respects- more secure because the person in this example is not likely to move their mortgage for many years to come.

In the present market valuations are basically meaningless because nobody can say for certain what values are in a volatile market, and in property – unlike equities – the time frame of transactions means that all we are seeing is educated guesses due to market lag on statistics, but these guesses are nonetheless having catastrophic effects on the people in the market who do want to transact. So far from needing ‘stimulation’ or ‘bailouts’ what the market really needs is enforcement of loan offers so that we don’t destroy the confidence of the few players in the market who actually want to transact.

The market isn’t in the doldrums due to lack of supply or due to a total exhaustion or absence of credit, if that was the case our firm would instantly cease trading, we are facing a primary, or perhaps even secular bear market and that is why transactions are so far down. The calls to ‘revive’ the market are a fallacy, you can’t ‘reinvent’ the market, what you can do is allow it to function rationally and efficiently where possible, and on that basis the Regulator should ensure that banks honour loan offers.

It is on the basis of these loan offers, and that basis only, that a person will confidently sign an unconditional purchase contract, if you revoke or change the loan offer post-fact you remove any shred of confidence a person may have in signing that contract, you essentially create a situation that destroys the remaining functional area of the market.