EAA publishes first set of standards for Statistical Valuation Methods for residential property in Europe

Today’s launch of a new set of standards by the European AVM Alliance (EAA) is a significant milestone in the move towards greater transparency for lenders, investors and regulators in the calculation of market value of residential property used as security for mortgage debt across Europe.

Why statistical valuations across Europe are important

There is currently EUR 7 trillion of outstanding mortgage debt secured against residential dwellings and almost EUR 2 trillion in outstanding mortgage covered bonds across Europe (the EU28). This debt is large and growing and accounts for over 50% of EU GDP.

All these residential properties are valued at origination, typically by a physical inspection, but there is a wide variance across Europe in the extent to which property valuations, and loan to values, are updated and tracked over the life of a loan.

This is important as loan to value is a vital measure in credit models and predicting loss from mortgage lending activities. Accurately tracking LTVs for pools of mortgages over time is essential for lenders, issuers of, and investors in, asset backed securities, rating agencies and regulators.

The time and cost of updating valuations for large numbers of residential property has been a major barrier to greater transparency over loan to values within mortgage portfolios, whether held on lenders’ balance sheets or within asset based securities e.g. covered bonds.

Statistical Valuation Methods remove this cost and time barrier and are used to provide a market value of a specific residential property or track the development of residential property markets more generally. Not all statistical methods are suitable for these two primary applications.

Launch of the new standards

The standards published today by the EAA set out, for the first time, the primary types of statistical valuation and deliver a thorough review of their suitability for different uses and how lenders, investors and regulators should evaluate the resulting performance of each approach.

Commenting on the launch of the Statistical Valuation Standards, Dr. Andreas Bücker, Director General of the EAA, says:

“The launch of these new standards is an important milestone in the move towards greater accuracy and transparency for lenders, investors and regulators in the calculation of market value of residential property used as security for lending across Europe.

The EAA have recognised the need to publish these standards to improve the understanding of statistical valuation methods, their suitability for specific requirements and how users can assess performance and accuracy of the resulting valuation outputs.

The Standards provide a starting point, and will be monitored, reviewed, amended and updated regularly, considering feedback from and in consultation with stakeholders, regulatory bodies, and market needs.”