The European AVM Alliance (EAA) publishes the second edition of the European Standards for Statistical Valuation Methods for Residential Properties

The new edition of the European Standards for Statistical Valuation Methods (ESSVM) delivers a consistent approach to statistical valuations of residential properties, providing unprecedented market harmonisation to support mortgage lenders, mortgage borrowers, investors, covered bond issuers and rating agencies.

Since publishing the first edition of the ESSVM, the EAA has adhered to its commitment to monitor, review and update them, following consultations with stakeholders and regulatory bodies and in accordance with any new market needs.
 
As a result, in the second edition definitions have been updated and more prescriptive elements have been added. In particular, more focus has been placed on guiding users and regulators when assessing the accuracy, objectivity and reliability of Statistical Valuation Methods. In addition, minimum requirements for performance reporting have been added, so that users and regulators have objective measures at hand to judge on the applicability of any Statistical Valuation Method for a given purpose.
 
To ensure the quality of the new Standards, they have been independently reviewed and approved by leading valuation experts and they have thus found Europe-wide recognition.
 
Undoubtedly, there are differences between different types of Statistical Valuation Methods and not all statistical approaches are suitable for all purposes. This fact, as well as the regulatory system and the market’s best practices, generate the need for a comprehensive, modern and clear framework to define the qualities that distinguish good and reliable statistical methods and their applications. Since Statistical Valuation Methods are still rapidly evolving, both in their use and in their modelling techniques, and since stakeholders have utilised different approaches and used them in a wide array of circumstances, the marketplace is in need of harmonisation.
 
Considering this background and the fact that any risks originating in the real estate sector can have a systemic impact and a pro-cyclical nature, the formulation and the dissemination of standards providing a consistent approach to statistical valuations of residential real estate is key to enabling the mortgage lender and investor communities, the rating agencies and regulators to operate in a more transparent and effective way in all European markets.
 
Across the EU there are approximately 250 million dwellings, almost 2 trillion Euros in outstanding mortgage covered bonds and over 6 trillion Euros of mortgage loans to households – an equivalent to 45% of the EU’s GDP. This makes the residential mortgage sector and the housing market in Europe highly relevant both economically and socially. 
 
In this context and as a learning from the financial crisis, where real estate collaterals played a prominent role, the present regulatory framework requires a more and more rigorous and frequent monitoring activity of real estate collaterals, in order to achieve prudent risk management within the financial system.
 
Consequently, the use of Statistical Valuation Methods has seen an enormous growth since the beginning of the decade, underpinned also by the regulatory framework, and today these models are relied upon by a wide array of market participants. Mortgage lenders, borrowers, regulators, rating agencies, covered bond issuers, investors and real estate agents are all firmly dependent on high quality, reliable statistical valuations for residential properties. In some European jurisdictions it has become established market practice that advanced Statistical Valuation Methods are used both for mortgage lending origination and monitoring, providing both mortgage borrowers and mortgage lenders with the important benefits of transparency, timeliness and cost efficiency.
 
This second edition of the European Standards for Statistical Valuation Methods for Residential Properties will continue to be reviewed and developed further. As before, feedback from stakeholders and regulatory bodies, as well as any new market developments will be considered.
 
The Standards are intended to provide an invaluable tool for the market to ensure that statistical valuations answer the market’s need for reliable, accurate and transparent valuations in the realm of residential property.

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