Internal Valuations and Valuation Accuracy in Germany

This paper is an analysis of the performance and accuracy of internal and external property valuations in Germany. Potential problems with appraised property values as estimators for true market prices are well documented by theoretical and empirical studies. Many issues, among them client influence and time lacks, are generally believed to be even more pronounced in internal property valuations. A unique dataset of over 4,000 individual properties between 2000 and 2013 is used for the analysis. A simple performance analysis shows that internal valuations follow external valuations with a time lack of approximately one period and that internal valuations react more volatile to market changes than external valuations. The main analysis reveals that over the time period under investigation internal valuations have significantly higher appraised values per square metre than external valuations. In order to assess valuation accuracy real transaction data is used to derive hedonic transaction prices. The Heckman correction is employed to correct for possible sample selection bias. The difference between the theoretical transaction price and the actual valuation can be used as an indicator for valuation accuracy. Preliminary results show that internal valuations are slightly above their market price while external valuations are slightly below the price achieved in the market. Both approaches produce on average accurate estimatiors of market prices with external valuations being slightly closer to transaction prices.