What challenges are appraisers facing at present?

The recent cooldown in Canada’s housing market has impacted every party involved at various stages of the real estate transaction – not least appraisers.

Performing a crucial function in assessing and judging the value of a home based on a range of factors, that duty has become more complex in recent weeks for Canada’s appraiser community as demand dampens, listings increase and the number of offers on many listed properties declines.

That creates a challenge for appraisers, who must decide whether a given transaction in their market is indicative of a trend or an outlier – and whether house prices can be expected to move upwards or downwards as a result.

Still, that reality shines a light on the valuable role played by appraisers in the real estate cycle, according to Appraisal Institute of Canada (AIC) chief executive officer Keith Lancastle (pictured top).

He told Canadian Mortgage Professional that the ability of appraisers to make an assessment based on a multitude of factors including local knowledge and recent comparable property valuations in the area gave them a significant advantage over so-called Automated Valuation Models (AVMs).

“That’s where the science of the appraisal [comes in], where our members prepare all of their work in accordance with our standards and the over 20 elements that make up an appraisal,” he said.

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“That’s the science aspect of it. And then there’s the art of understanding and that’s where the experience, expertise and local knowledge of an appraiser becomes that much more critical.”

Engaging an appraiser with local knowledge and an understanding of the regional market is a key step in the real estate process, Lancastle said, although he added that where specialized properties are concerned – for instance, hotels or golf courses – an appraiser based elsewhere in the country, but with a specific niche, could be the right move.

“That’s not an each and every case [that] it’s got to be local, but it’s making sure that you’re getting that expertise in local markets, and where properties are specialized, in that property type,” he said.

Brokers and their clients can sometimes become frustrated when appraisals come in lower than the agreed sale price, a trend that can be commonplace in a feverish housing market like Canada’s over the past number of years. Still, Lancastle emphasized that the responsibility of appraisers is not to close the deal, but rather to offer a sober second thought that’s detached from the emotion that sometimes pervades the homebuying process.

“Appraisers’ role is to determine for the lender, borrower and for all parties what the true market value is,” he said. “If I’ve overbid on the property by $100,000 because I love the fact that it’s got a wine room in the basement, or it’s got a cigar humidor or something else… that’s my emotion and that’s my personal value set.

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“I shouldn’t necessarily expect the lending community, and by extension society, because of the insured nature of some of these mortgages, to underwrite my emotion, my love for this particular property.”

Another advantage of appraisers over automated models is that they have the ability to make their judgement based on real-time values, Lancastle said, as well as accounting for individual neighbourhood quirks. “[AVMs] certainly won’t be able to look at the characteristics of a subject property in the same way as having actual boots on the ground and having an appraiser see the property.”

Having recently addressed a parliamentary committee assessing the Housing Accelerator Fund and its impact, Lancastle highlighted the fact that housing market demand will remain strong even despite the likely cooling effect caused by increasing supply.

“You’re still going to get increasing demand as we start to emerge from the pandemic, and you start to see levels of immigration return to what they were anticipated to be pre-pandemic,” he said.

That’s likely to be the case across the country, according to Lancastle, with the pandemic having demonstrated that appetite for housing is not merely confined to the country’s hottest markets in large urban areas such as Toronto and Vancouver. 

“We’ve always thought of it as predominantly a GTA [Greater Toronto Area] and GVA [Greater Vancouver Area] issue but I think the pandemic moved the needle on that one,” he said.