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Automated property valuations -
Source Choice Magazine
Lack of accuracy
"While Automated Valuation Models (AVMs) may be useful for lending institutions
in a portfolio and mortgage situation, I have grave reservations about their
general use by consumers."
So says Peter Rossini, Program Director of the University of South Australia’s
School of Commerce. Peter has published several research papers and studies of
automated property valuation models.
The competing websites get most of their data from the same sources — state
government property sales registers. They supplement this with information about
recent sales from their estate agent contacts, and details of properties’
attributes. Complex statistical modelling of various types (including hedonics,
which takes into account individual property attributes, such as the number of
bedrooms and presence of a parking space) is then used to generate estimations
and values. Each model uses its data differently, putting more or less weight on
particular components.
However, each company knows that only a portion of the automated estimates it
sells is within the right range.
Residex, for example, says estimates will generally “only be in an acceptably
tight range in around 70% plus of the cases regardless of who undertakes the
calculation”. If correct, that means around 30% of estimations from all
companies are off the mark.
Residex concedes that “where there is the potential for such significant errors
it is possible to unintentionally mislead the public.” For that reason, the
company’s reports provide “rules and test values for the users to confirm and
identify a value from and to help the user become more familiar with the
valuation process”.
RP Data points out the limitations too. “We don’t want people thinking they can
rely on an automated valuation,” it says.
Research in the UK, where automated valuations are also used, acknowledged the
overall good performance of the tested models, but found that low-value
properties are more likely to be overvalued, and high-value properties are more
likely to be undervalued. It also found more variation (errors) in less
homogenous segments of the property market, such as regional or rural areas, or
suburbs where properties aren’t similarly designed in a uniform pattern — which
is a much more common situation here than there.
In the UK, automated systems provide an indication of confidence in the accuracy
of the valuation (sometimes referred to as confidence levels or uncertainty
levels). In Australia, however, only RP Data reports give an indication of the
accuracy you can expect, which varies from suburb to suburb. Its ‘Forecast
Standard Deviation’ (FSD) is a 68% probability that the report’s estimated value
and the ‘true valuation’ of the property are within a certain range. An FSD of
15, for example, should mean there’s a 68% chance of the estimated value being
within plus or minus 15% of the true value.
Australian Property Monitors claims that on average, half its reports are within
10% of the property’s sale price, and that 80% are within 20% of the actual
value. Residex doesn’t display its confidence level for individual property
estimations to the public, only to banks.
So property websites recognise their own limitations, and legal disclaimers
point out that consumers shouldn’t rely solely on their figures. “Our reports
are a guide or tool, but you need to get a valuation later,” says Residex. “A
valuation is much more detailed and accurate than our Property Explorer reports
could ever be 100% of the time.”
Australian Property Monitors echoes those comments. "Our reports should be used
as part of a suite of research undertaken when buying a property. Customers
shouldn't rely on our reports in isolation for financial decisions. Buyers also
need building inspections and other due diligence. We have specific disclaimers
to protect us because we want customers to use the report as an estimate not a
valuation. Only a licensed valuer can give a valuation."
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