Author: Miles Fordyce, Chief Digital and Innovation Officer, REINZ
By incorporating machine learning and artificial intelligence (AI), our Automated Valuation Models (AVMS) have been taken to new heights, enabling the most accurate property valuations to date.
Automated Valuation Models use data analytics and algorithms to estimate the value of a property and are becoming increasingly popular in real estate and financial services. They are particularly useful for banks, mortgage lenders, and real estate investors that need to make quick decisions or be informed about a property's worth. AVMs can supplement the knowledge of real estate salespeople and provide them with a powerful tool to evaluate the value of a property quickly.
Relying on a wide range of data sources such as recent property sales data and public records from the council and government, AVMs then use this data to generate a property value estimate that is based on the property's characteristics like size, location, age and other features.
Historically, the algorithms used in AVMs were based on a concept called regression analysis — a statistical method used to find the relationship between variables such as a property's characteristics and the sale price of similar properties in the same area.
How our new model works
At REINZ, we’ve taken this one step further by creating a model which uses machine learning and AI to generate millions of calculations and variations, enabling them to learn from prior monthly models to predict what a particular property would sell for. Where data is missing (like the number of bedrooms or bathrooms), the model can impute these from other properties of a similar nature.
For example, if council records show zero bathrooms for a 250m 2 residential house (because of incomplete data records), the model will look across similar homes and predict two bathrooms as a minimum. The model then generates a confidence score (how accurate it thinks the value is) and a quality score (how much data existed, versus imputed), and combines these into an overall value and confidence factor. These numbers are then used to create a lower and upper amount, and an expected sale price with the breadth of the range changes depending on the confidence score.
REINZ has different models for different regions and property types which ensure the right model is used for the characteristics of regions and properties. We provide this information to members and our partners.
The model provides a high level of sale price accuracy like none we’ve seen before. We’re currently investigating the ways in which we can utilise our AVM further to support investors and homeowners in understanding the implications of property changes (like adding another bedroom, bathroom, or adding a garage) as the AVM can reprice the property on the fly.
But it’s not just real estate professionals and buyers or vendors that can benefit from AVMs. There are several applications within the real estate industry:
Mortgage lending
AVMs are often used by mortgage lenders to evaluate the value of a property for loan purposes. Lenders use AVMs to assess the risk of the loan and determine the loan-to-value ratio. AVMs can also be used to evaluate the value of a property during the refinancing process.
Real estate investment
Real estate investors use AVMs to evaluate potential investment properties quickly. AVMs can provide investors with an estimate of the property's value and help them determine whether the property is worth further investigation. AVMs can also be used to evaluate potential rental properties and estimate the potential rental income.
Home Valuation Websites
Home valuation websites such as realestate.co.nz use AVMs to provide users with an estimate of their property’s value. These websites use AVMs to generate a property value estimate based on the property's characteristics, recent sales data, and market trends. These estimates are reasonably accurate (within 10% for the great majority of cases) and can provide homeowners with a sound idea of their home's worth.
AVMs are great but are not a substitute for a professional appraisal. AVMs provide an estimate of a property's value, which can be used as a starting point for further investigation. A professional appraiser will consider a wider range of factors and provide a more accurate valuation of the property.