KEY POINTS:
Our banking system is very similar to Australia's, largely because our big banks are owned by Australian banks and because banks on both sides of the Tasman have lent heavily to home occupiers and investors.
But there is one big difference.
Australia's banks will only accept a property valuation from a valuer they specify and pay.
The bank in Australia will choose a valuer from its panel of valuation companies before it approves a loan.
The cost of the valuation is often passed on to the borrower, but the relationship is clearly between the bank and the valuer.
The valuer will often be conservative about the property's value because any over-valuation will eventually be detrimental to the bank, which has funded much of the deal.
The key thing is that the bank is the valuer's client, not the homebuyer.
In New Zealand, the shoe is definitely on the other foot.
Here, the borrower chooses the valuer, not the bank. Often the borrower will choose the valuer recommended by the real estate agent during the sale process.
This means the valuer feels beholden to the homebuyer first, and often to the real estate agent next.
The bank is an adversary, rather than a client.
The bank has virtually no come-back if it finds the property is worth much less than the valuation.
In the past five years, it has been in the valuer's interest to provide an optimistic valuation because that meant the borrower could get a loan more easily and the deal would go through more easily.
All this is fine in a rising market when the rising tide will cover all sorts of mistakes.
In a falling market this is a problem for the bank and, by extension, the depositors in those banks who want to be sure the banks are being careful with their money.
New Zealand's valuers are mostly small operators - one-man bands or small practices from home offices and suburban office buildings.
They would, of course, reject any implication they pump up valuations to ensure they keep a cosy relationship with a real estate agent or investor.
But it's not unheard of, particularly in the area of investment apartments and the practice of same-day selling, when a property is bought and sold by a middleman with a friendly valuer and a gullible end purchaser.
The practice is known as "hydraulicking" and was involved in many instances of mortgage fraud reported earlier this year.
Complaints were laid with the Valuers Registration Board against valuer Tony Kidd, of PRP, earlier this year over apartment valuations. PRP did valuations for hundreds of Blue Chip properties.
Our banks end up with problems when mortgagee sales reveal assets are worth less than their first valuation.
New Zealand banks should adopt the practice of their Australian parents and appoint panels of valuers they can monitor and hold to account.
Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.
