Don’t get confused by rateable valuations

Confused fruit talking to each other

The newspapers are full of commentary regarding the mass rating reassessment being carried out by the Auckland Council in partnership with the valuations company QV. It is important to understand what is going on and what impact it will have upon the property market.

Each local authority around the country has an obligation to undertake a mass appraisal re-valuation every 3 years. This provides local councils with a methodology for the apportionment of the local body rates. In principle and in simplistic terms it is a way to charge those with higher value properties with a proportionally higher rates bill. The actual rates you pay does not increase in direct relation to the increase in value of your home, however if your property revaluation results in an increase higher than the average of the past 3 years (in the case of Auckland this has been signaled as being 33%) then you will see your rates bill increase by more than the level the council is proposing for their 2105 budget which is looking to be around 3%. Homeowners will be notified of the new valuation in November.

There is a very important distinction to be made between this process by which the council establishes a Capital Valuation (CV) and a property’s valuation. As you will no doubt be aware the current 2011 CV for a property is about as relevant as the NZ dollar to US dollar exchange rate from July 2011. So it will be with the 2014 CV in due course. These estimated valuations are a snapshot in time which based on recent local sales and using a computer algorithm generate an automated CV. Certainly the process has check and balances, but at the end of the day that CV for your property was never created with the input of an individual professional valuer. That is the difference between a CV and a registered valuation as the latter is a report written, backed up by a trained and registered valuer that physically inspects and assesses the property. That is why registered valuations are trusted and relied upon by banks for assessing lending facilities on a property.

Having made this clear distinction there is no way to avoid the common practice which undoubtedly will occur in November whereby people start assuming that their house is now worth what the latest CV says. This is only reinforced by the comment found on the Auckland Council’s website, which states that the CV is “the assessment of the most likely selling price had the property been sold on 1 July 2014”. There it is in black and white the Council says your CV is the most likely selling price! Set against this backdrop of media messages and water-cooler chatter over the next few months the key question is, what impact this will it have on the property market and what you should do if you thinking of buying or selling?

In my view these next few months leading up to the new CV’s will have a dampening effect on the market as it creates an uncertainty in the minds of buyers. The last thing they want to do is to offer more than and certainly pay no more than the new CV - but how could they know what that is? - the CV’s won’t be released until November - this is going to be the Mexican standoff of the next few months. If you are a buyer and you are smart and serious about buying, then forget about this issue altogether as it will only be an issue for ill-informed people. Smart, savvy buyers know the value of a property is not assessed by looking at the CV but from making objective assessments based on what similar properties have sold for in the same area over recent months and then looking and following what selection of property is on the market at this time and what’s the price expectations of these properties - the CV has no bearing on this. The most important consideration is the overall balance of supply and demand in the local market matched to the personal circumstances of the sellers. This is the insight you need as a buyer. If on the other hand you are a seller then you will have to make allowances for the fact that some potential buyers will be approaching the market with this cautionary mindset. My advice would be to attack this issue head on.

Here is a radical idea as a seller - get a registered valuation and share it!

Imagine for a moment you were a buyer and the house you are interested in buying had a current CV (2011) of $375,000. When you asked the agent about price expectation, they stated that they were expecting offers over $500,000. In this environment you, like many others may well be wary and hold off fearing that the new CV would be $500,000 and you end up paying $545,000 for it. Now imagine that the selling agent gives you a copy of the registered valuation undertaken in the past month stating that the registered valuer attaches a value of $530,000 to the property. How much more likely would you be to making an offer than waiting until November? The fact is that just because a property has a registered valuation of $530,000 does not mean it has to sell at that price. The price that the buyer will pay is determined by what their capacity to pay and their desire for the property matched to the seller’s expectation of true value. If the seller has gone to the trouble of getting and sharing a registered valuation then they are stating a confidence in the process. The final selling price is then a function of how much interest and thereby demand there is in the property. This latter fact is a function of smart marketing designed to create interest and competitive pressure.

So it may be a great time to think outside the box and reflect that the next few months leading up to the release of the new CV’s may not be a time to hibernate but to be a smarter buyer or seller and go against the tide, you could be rewarded.