The Australian Prudential Regulation Authority has warned home lenders that their cutting corners on property valuations could expose them to unacceptable levels of bad debt in a major downturn. The nation's banking regulator's chairman John Laker said the increasingly widespread practice of banks lending on the basis of "sight unseen" property valuations had not been tested in a property market downturn. He said APRA would pursue weaknesses it had identified in valuation practices with the institutions concerned, and urged all lenders to put "appropriate controls" in place to manage the higher level of risk. The new valuation techniques generally involve a shift away from the traditional, but more expensive, approach of using an independent valuer to make a site visit and an internal. In some cases, banks are using cheaper, "drive-by" valuations with no internal inspection, or even a "desk-top" approach involving statistical analysis and comparative prices in the same suburb. An APRA survey of 96 lenders who control the US $500billion mortgage market found that some lenders physically inspect less than half the properties they used as security for loans. "It's a major problem," said Ian Herriott, senior partner of Queensland's biggest independent firm of valuers, Herriotts. "There are many lenders relying on computers to do their credit analysis, and in a falling market it's a recipe for disaster." Property prices have been under pressure since last year when the housing bubble began to deflate, helped along by a 0.25 per cent rise in official interest rates in March. Investment bank JP Morgan said earlier this month that prices could fall by as much as 10 per cent over the next 12 months, even without a further rise in rates. APRA began surveying lenders' property valuation practices in the last quarter of 2004 to see if there was a trend towards less-rigorous techniques that could affect their viability in a major downturn. It found that 94 per cent of valuations were undertaken by external parties. Of those valuations, 72 per cent involved some inspection of the property, including internally, while 22 per cent were completed remotely. Mr Herriott said drive-by valuations involved "driving past a property at 60km/h and hoping there's a house on the property". "It should be used only in low-risk lending where there is a low loan-to-valuation ratio, but increasingly it's being used in higher-risk situations," he said. APRA said it understood the pressure on lenders to cut valuation expenses. But it agreed the new techniques should be limited to lower-risk lending. "In addition, it is important that alternative methodologies have been appropriately researched and approved at senior levels, with a suitable level of subsequent back-testing," Mr Laker said. About Australian Prudential Regulation Authority The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately US $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.