For sale - at a price that's far too high

Are you being ripped off by a dubious valuation on a new-build apartment? Mortgage lenders said this week that they are becoming increasingly concerned at valuations on new-build flats which are inflated to the point where a Manchester home can have a Monaco price tag.

The Council of Mortgage Lenders (CML), which represents the bulk of banks and building societies, says the public is being duped by surveyors who rubber-stamp developers' advertised prices for apartments at far higher levels than the market can sustain.

New-build flats have mushroomed in the capital and city centres across the country, and now account for 50% of all homes being built in Britain. Many are sold "off-plan" before they are built, with developers accustomed to getting the deposit cash in early. Punters make a commitment with only computer-generated images and plans submitted to local authorities as a guide.

Without a real house to walk around, surveyors must judge its valuation based on other things. Too often, the CML argues, the result is a figure that exactly mirrors the advertised price. Not unusual, you might think. Just a reflection of a sophisticated market and professionalism on all sides.

Not according to some lenders. Off-plan developments are commonly sold at a significant discount to the "official value". Some builders will tell potential customers their reward for buying early is a 20% discount. Others will make the "value" of the purchase deal more complicated with an array of inducements such as cars and furniture.

Earlier this month, The Mortgage Works, an arm of the Portman building society that specialises in buy-to-let properties, said it would stop lending on new-build properties targeted at buy-to-let customers. It said valuation in the sector was "more of an art than a science".

One estate agent in Nottingham told property trade magazine Estates Gazette: "Nottingham is flooded with flats. It's difficult to sell them and investors are catching a cold."

Richard Jones, a sole trader agent, added: "A lady asked me to value her flat. She had paid £210,000 for it. I couldn't honestly value it at more than £150,000 on a good day. That was after just seven months. And even at that price it'll be tough to find buyers."

Cheshire surveyor Peter Cunliffe told the magazine: "There's a cosy accommodation between the volume builders, major mortgage lenders and corporate firms of valuers. Not only are the comparable rules ignored regularly to enable sales to proceed, but the message is there all too clearly for the valuers: down-value and you'll get no more instructions. But all this will come out when the housing market inevitably goes into reverse - it always does before the next boom."

A behind-the-scenes row is believed to have taken place between the CML and the Rics, the surveyors' professional body. But on the record, the CML is less aggressive. It says valuations of newly built flats "is something that is on our radar".

A spokeswoman says the organisation is talking to the Rics about the issue and looking at whether there is anything else lenders should do. This official response is understood to disguise frustration at the way the market has developed and lenders' vulnerable position.

The CML believes the increasing concern expressed in some quarters about valuations reflects the fact that a very high proportion of all new-build properties are flats. That prompts questions about whether or not the market is delivering what people want, and whether valuations are "robust" in this environment.

The CML spokeswoman says the use of discounts and inducements has given rise to "a concern about how effectively those valuations are being benchmarked against the wider market".

A spokesman for the Rics denies it is complacent. He says the institute's valuers operate under a "clearly defined regime of standards and rules of conduct". These specifically state that in the case of new-build residential property, "undue reliance should not be placed on the notified sale price." They also require valuers to properly reflect any incentives paid to the buyer.

Many two-bed flats are purchased through property investment clubs. These usually charge a fee to join and further fees for "get-rich-quick" seminars. Valuations by the clubs have come under scrutiny, with many in the industry alleging they artificially inflate prices in order to offer bigger and more tempting discounts.

Rics is keen to stress that not all players in the property investment club world operate under the same level of professional standards and regulation. It says the "improper activities" of some clubs have given rise to serious public concern, culminating in May with several being closed down by the Department of Trade and Industry.

"If there are cases of Rics members falling short of our standards, Rics... will fully investigate any such allegations," says the spokesman.

Estates Gazette says problems persist and are widespread. It learned about a block of 350 flats, all sold off-plan in 2003-4, which local estate agents are advising owners to advertise for rent. A sale would result in a significant shortfall because original off-plan prices were unrealistic.

The developer says it has achieved prices of £250,000 for some of the flats. However, the independent agents argue similar flats in the city centre are selling for £145,000. Why, when there is already a surfeit of these homes in the city centre, would a development half a mile away sell for more?

One unnamed lender told the magazine the "panel valuer" used by the developer stated that the purchase price on instruction was £250,000. This figure failed to take into account a discount which was only disclosed to the buyer. The real price was £212,499.

In a case like this, the lender may offer a 100% mortgage for more than the purchase price, and if the entire valuation was make-believe, then the lender along with the purchaser is immediately plunged into negative equity.

Negative equity might not be a short-term problem. Investment bank Dresdner Kleinwort Wasserstein says new-build flats have fallen in value by 5.6% in the past three months. If the two-bed flat explosion continues, prices have only further to fall.