CML news & views

Confidence in the market for newly-built homes will be reinforced by measures we are planning to introduce later this summer to make the valuation of newly-built property more reliable. 

From 1 September, lenders will require industry professionals acting on their behalf in transactions involving newly-built homes to follow a new protocol for valuing property. The changes we are making are intended to ensure that any discounts on the price of newly-built properties or other incentives offered by sellers - or negotiated by buyers - are captured in the conveyancing and valuation process. Conveyancers will be required to ask a series of questions that will deliver clarity and transparency for lenders on price discounts and other incentives.    

By ensuring that conveyancing and valuation processes capture the true value of the property, we will be helping to reduce risk for both borrowers and lenders. Our initiative has been widely supported by a range of stakeholders in the market for newly-built homes – including builders and developers themselves. 

At the same time as we implement our changes in September, the Royal Institution of Chartered Surveyors (RICS) will also make it mandatory for its own members to ask about incentives. The changes we are making are also supported by the Home Builders Federation (HBF) and Homes for Scotland (HfS). And a number of major builders are taking their own steps to ensure there is greater transparency about discounted prices and other incentives offered to buyers of newly-built properties. 

Market conditions

We have been working on these proposals with members and other stakeholders for some time, but implementation of the proposed changes is timely, given current market conditions. Like many other commentators, we have recently revised our market forecasts downwards in anticipation that house prices will fall more sharply in 2008 than we had originally expected. Specifically, we believe that by the end of this year property values will be 7% lower than they were 12 months previously. We also believe that the number of property transactions in England and Wales will total 770,000 this year, 35% fewer than in 2007. 

Falling house prices, and a lower number of housing transactions, may intensify pressures on builders and developers to offer discounts and other incentives to buyers. Although operating in exactly the same market conditions as private sellers, they are often under much greater pressure to complete transactions. Private sellers may be deterred from selling, particularly if their decision is a discretionary one. But developers need to sell completed new homes that remain on their books and continue to tie up their capital. 

The pressure to discount to achieve sales can be even more intense in locations where there may be an over-supply of similar types of newly-built properties. A number of commentators have identified some city centres as locations where there is an over-supply of newly-built flats. Here, discounts may be larger and even more readily available.   

The range of incentives

Incentives to buyers can also take a variety of forms. As well as straightforward price reductions, there may be offers of cash-back deals, payments covering deposits, stamp duty, legal fees and even removal costs, and incentives like new, fitted kitchens, including 'white goods' or other electrical appliances, like flat-screen televisions. 

Some lenders have been concerned that current valuation and conveyancing processes do not always capture the wide range of incentives on offer. If they fail to do so, it could mean that, in some instances, lenders may unintentionally offer a mortgage based on a valuation of a property that is higher than the true price paid for it. That involves a greater risk for the buyer, who is protected by a smaller cushion of equity, as well as the lender.

In many cases, the failure to report incentives and discounts to lenders is simply an oversight. There may be no deliberate intention to mislead the lender, although there may still, of course, be a greater risk – and, moreover, one that the lender may not be aware of. In other instances, however, the failure to report the true transaction price may be intentionally fraudulent. In a market in which discounts may be readily available, conveyancing and valuing processes that do not capture the true price paid for a property could be targeted deliberately and systematically by fraudsters.   

Indeed, the 2008 Financial Risk Outlook, published earlier this year by the Financial Services Authority, highlighted an increase in fraudulent activity targeting newly-built flats in city centres. In March, the Law Society of England and Wales published a revised mortgage fraud practice note addressing the problem. And the Council for Licensed Conveyancers issued new guidance last November.

Tightening the rules 

From September, lenders will require builders or developers selling any newly built, converted or renovated property to complete a new 'disclosure of incentives' form. To reinforce this, we will be modifying our Lenders' Handbook, setting out detailed and specific requirements for conveyancers acting on behalf of lenders in property transactions. 

This will mean that the conveyancer acting for the lender will have to have received the incentives disclosure form before submitting the certificate of title. The conveyancer acting on behalf of the builder or developer will have to supply the form as part of the contract information pack. Lenders will be able to set out their own specific requirements in 'part two' of the Lenders' Handbook. 

The form will contain 12 questions, requiring disclosure of full details of any incentives. It also asks for information about any third-party interest in the property sale. In drafting the form, we have consulted with lenders, valuers and developers. The HBF and HfS have issued a joint statement in support of our initiative, and we have also consulted with the Home Builders' Association and the Construction Employers' Federation in Northern Ireland.  

Responsible builders and developers understand why we need to clarify the way in which information about incentives is available to lenders. In the past, there has been confusion and inconsistency. Builders and developers understand that lenders must have confidence in the valuation process and that, by implementing our proposals, we are helping to underpin confidence in the market for newly-built homes. 

Support from surveyors and developers…

From 1 September, the RICS is modifying its 'Red Book', containing mandatory rules for surveyors, along with guidance on best practice and related commentary. The Red Book will ensure RICS' members account for incentives when valuing properties. 

A statement issued by the RICS said that the changes it was making to the Red Book would help protect the market for newly-built property from fraudulent activity. "Buyers, lenders and valuers have all been victims of non-disclosure of incentives by developers," the statement said. "All parts of the property industry are in agreement that standards must be maintained and that the consumer must be protected from a disingenuous practice."

In its joint statement supporting our initiative, the HBF and HfS said: "The steps announced by the CML build upon the amendments introduced earlier by the HBF and HfS to strengthen their codes of conduct, and underline the industry's commitment to transparency.   

"These initiatives will ensure that housing developers maintain the confidence of mortgage lenders, and help facilitate the process of buying a home."

…and from members 

The action we are taking is also supported by our own members. Reacting to our announcement of the changes we are proposing to implement, the managing director of Heritable Bank, Adrian Scott, said: "Mortgage lenders need to be able to rely on the valuations of property that they receive, and recent incentives to purchase newly-built property have muddied the water here, making the task of surveyors more difficult.

"Heritable Bank welcomes the CML proposals. With mortgage lending on new-build property almost grinding to a halt, this initiative is to be applauded.  As a lender who has been active in the market for new-builds, we call upon developers to confirm their support for this scheme. 

"Perhaps more significant is that this is an excellent example of cross-industry co-operation delivering a solution to one of the issues with which the whole industry has been grappling. We would like to see more of this collaborative approach."