Rants, Raves, Reviews

The Captial Value and Rates Rort

By Gary R, in , posted: 20-Nov-2007 16:01

Here in Wellington our local council deems it necessary to send out a Quotable Value (QV) property valuation once a year. Most other regions I know of are only every 3 years. We purchased our house in 2005, in 2006 the QV CV (Capital Value) was up 24% on the previous year and now it is up 20% on last year.

A CV does not include chattels and is simply based in the average selling price of similar sized houses over the last 12 months. Essentially it is a 'snapshot' of the market as at September 1st in any given year.

If you go and look at any property (as we have done recently) the Real Estate agent will quote you the current CV as an indicator of the property's value. We looked at a property up the street we live in simply because it had a flat section. This house had not been decorated since the moon landing but it had the same CV as our own house because of the bedroom count and house size. The agent indicated that the owners were looking for offers over the CV and that typically houses sell for 10 to 20% over CV in our area. I worked out what they were after and then calculated that the house would need at least $100K worth of renovations (new kitchen, bathroom, etc, etc). It simply wasn't worth it but the house did sell after 3 weeks on the market.

So, you can own a shitter in a good area and you will still benefit from the same CV calculation used for the mansion up the road even though the true value of each property will be poles apart. The council sets the CV which is then used by both the vendor and the purchaser to gauge value. The market does not decide what a property is worth it is the council who decides and most buyers would be more than happy to pay as close to CV as possible. Close to, below or bang on CV is considered a bargain.

The problem with yearly CV calculations is that not only do they inflate the value of property in an area but that they also give the council an excuse to raise the rates. Last year (for this current period) our rates went up by 15% and next year I expect them to do the same. This equates to a 28% increase in rates since we purchased the property 2 years ago. If they keep rising like this and if my salary stays flat I will not be able to afford the rates within the next 5 years. As it is with the current CV on our property we are priced out of the market. If I work out on average what our house is worth (based on a market value of 10-20% above CV for the area), factor in the equity we used to get into the house in the first place and then base a mortgage on the balance at the current interest rates we could actually not afford to buy our house. This is all in the space of 2 years and we originally went in with a 30% deposit!

Sooner or later the council needs to come up with a new method of rates valuation. We certainly do not use more water, rubbish disposal or any other council (rates) funded amenities than we did two years ago but we are faced with paying 28% more for the same.

This is the rating paradox where people living in supposed more affluent areas (based on average selling price of property) pay more in rates than those living in supposed lower socio economic areas. But as we all know crap suburbs do become affluent as more and more people are forced to purchase property further from the city. We live in what is called the 'Western Suburbs', which makes me a Wellington Westie. This is a huge catchment which covers the million dollar houses in Kelburn and the state houses up the back of Karori. A few houses selling for a million in Kelburn skews the values on the rest of the suburb, forcing up the average and raising the rates for everyone. I would rather see rates calculated on a mixture of land size, house size and number of bedrooms rather than the average sales value. Afterall 2 people living in a small house in Kelburn are going to use less water than the family of six in Newtown. Rates should also be capped and pegged to inflation. Inflation is in the range of 1 to 3% and so should be rates increases.

The irony is that if you complain about your CV the council sends in QV who are most likely going to value you higher because they have seen the house. It actually happened to a friend of mine. Good idea but it can backfire.

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Comment by sbiddle, on 20-Nov-2007 17:13

What really annoys me is the number of people running in the local body elections who promised "low" or "lower" rates or "no rates increases". They're all full of crap because councils don't seem to consider rates increases an increase when they're a result of CV calaulations!

Comment by TinyTim, on 21-Nov-2007 09:48

Argh, rates. A week and a half till the next installment. Although, our rates didn't go up this year (well, only $10/quarter) - we only had a 6% CV increase last year which is presumably less than the average CV increase.

I'm pretty sure that the valuation uses a smaller resolution than suburb-wide prices. E.g. each land value is based on a formula that take into account desirability factors such as area (e.g. which street), access (street front or back section), steepness etc. Presumably the house value is based on something similar.

There is also a fixed component for some services in the rates - like water, reflecting that houses with higher values don't necessarily use more water. I believe that this year there was a shift towards higher levels of fixed charges for things like water, which meant properties with a lower CV had a higher increase than those with a higher CV.

Getting a new value each year helps smooth out changes in your rates. In three years a lot can happen and give you a real shock in your rates - like the Waiheke ratepayers whose rates went up by an order of magnitude one year after their land went from being rated as farm land to being rated as prime subdividable suburban in the three years between valuations.

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