Reliability of an index approach to property mortgage security valuations
In order to comply with the requirements of the Basel II Accord, banks need to frequently assess the market values of properties secured by mortgages. In lieu of property valuation reviews done by professional valuers, an index-based approach could potentially be used by banks to value property. This paper presents a study undertaken using data and resources from a South African commercial property finance bank to assess whether index-based valuations produce statistically similar valuations to those given by professional valuers. It was found that in the case of the particular bank, index-based valuations provide statistically similar market values to traditional valuations. Furthermore, index-based valuations provide consistent results when updating market values for properties with older historic valuations in the same way as for properties valued relatively recently. An index-based approach to review market valuations may thus provide considerable cost savings.