Appraisal Methods and the Non-Agency Mortgage Crisis

Since the global economic crisis of 2007–08 an increasing amount of attention has been directed to the links between the financial system and the real estate industry. This paper ties to this discussion insofar as it focuses on the relationship between the methodology of property valuation and the recent non-agency or subprime crisis. After a brief discussion of the crisis various questions are raised concerning both the theoretical background and the application of property valuation, property management and automated valuation modelling. Despite the magnitude of the crisis in terms of the financial loss suffered, our observation is that the mainstream real estate academia is still essentially preoccupied with the task of integrating financial and property markets. Apparently, after the crisis financial models based on the concept of perpetual increasing income are still used, and deterministic relations between value and property characteristics still constitute the dominant paradigm. In the hope of avoiding repeating the errors that led to the crisis we identify the need to analyse this crisis from a property valuation point of view. We contend that in-depth analysis of the tools used in property valuation is necessary to understand why and how valuation methods should be improved given recent experiences.