It’s that time again – all over New Zealand many homeowners are receiving letters from their local council with updated rating valuations enclosed. If it is your first time owning a home, you may be wondering what to make of the house values indicated in those letters. Is this how much your house would sell for? Will your rates go up? The letter says you can dispute the valuation. Would you want to do that? For most councils across the country the closing date for objections to valuations is around mid-January 2022.
Every three years local authorities (councils) revalue all properties within their district or city. This is a requirement of the Rating Valuations Act 1998. Revaluation is a mass exercise to get a snapshot of the value of all properties in a single point in time. Then, the values are used to determine each ratepayer’s share of rates. Because all properties are valued at the same point in time the results are believed to be balanced and not skewed by recent sales when the market goes up or down.
"The rating valuation will list three values: Capital Value (CV), the Land Value (LV) and the Improvement Value (IV)."
The purpose of the rating valuation is to determine the fair share of rate. The rating value assessment is focused primarily on land value and building floor area, because these are proxies for calculating how much of city’s services are used by a particular property. The rating valuation will list three values: Capital Value (CV), the Land Value (LV) and the Improvement Value (IV). The CV and the LV are variables here that are determined by the valuation.
The Improvement Value is simply calculated as the difference between CV and LV and does not represent the replacement value of buildings. It can be thought of as a portion of your Capital Value derived from qualifying improvements on your land. The house, garage and driveways qualify as substantial improvements, but a small portable garden shed for example is not the kind of improvement that would impact on your Capital Value. There has been a general trend of Improvement Values decreasing as a function of Land Values going up, which is a result of high demand for development land.
Insurance companies will have more precise tools to calculate replacement value of buildings, which may differ drastically from the Improvement Value noted on the council valuation. It makes sense that the quality of your bathroom tiles and age of your carpet would be taken into account by home insurance, but should not make a difference for how much rates you owe the city. However, if you have more bathrooms and more bedrooms, meaning more people can live in your house and flush the toilet, drive on the roads, go to the library, etc – then this will be included in your Capital Value as the Improvement Value portion.
"...a property with a CV of $1,000,000 typically would not have a rates bill of double that of a property with a CV of $500,000."
How the Rating Valuation impacts annual rates calculations is not linear. For example, a property with a CV of $1,000,000 typically would not have a rates bill of double that of a property with a CV of $500,000. In other cases, if a higher value rural property doesn’t have the same council services such as water or sewerage, compared to a lower CV comparative urban property, it may also have lower annual rates.
District and city councils set their property rates in their Long Term Plans, which are reviewed every 3 years. Rates are set as a percentage of the rating valuation. However, should CVs increase this does not technically mean that the rates must go up. In principle, council could choose to drop the rates percentage in view of high CV values. This of course never happens. Councils tend to struggle to raise enough rates to cover all the projects the communities require. Long Term Plan consultations tend to be very contentious. So then, once the rates increases are locked in, it’s not surprising there is no political appetite to then turn around and drop rates across the whole district.
Just to throw in more acronyms, a Rateable Value (RV) is the value that council has chosen to base its rates calculations on. Councils can choose whether to base the rates on Capital Value or on Land Value. When the rating is based on Capital Value, the RV is the same as CV.
Some property owners decide to dispute the rating valuation in an attempt to lower their individual rates assessment. This may seem as a clever move from the perspective of cost-saving but can backfire in the future. A lowered rating valuation may negatively affect future market valuation of the property when it comes time to sell or refinance. On the flip side, disputing a valuation in order to increase it can be an important strategy to ensure that the property can achieve its full valuation potential in the future. This is because buyers and other valuation tools still include CV in their consideration of indications of price, and lenders also take it into account in their assessment.
"...disputing a valuation in order to increase it can be an important strategy to ensure that the property can achieve its full valuation potential in the future."
Under the Rating Valuations Act 1998 owners/ratepayers have a right to object to a valuation of their property. This can be done through providing evidence, or through getting an independent valuation. Councils then review the objections, and if the ratepayer is dissatisfied with the outcome, they can take the dispute to the Land Valuation Tribunal. These tribunals are made up of registered valuers and District Court Judges. The vast majority of objections get resolved at council level.
Most councils contract out the valuations to private companies. It can be a bit mysterious as to how to dispute the valuations when very limited information is provided on what was taken into account for each property. The mass appraisal desktop valuations are not like private registered valuations, where a valuer comes to the house and provides a report with detailed reasoning, as well as comparable recent sales in the area.
For rating valuations, a mass appraisal method is used where values are generated based on market movements. Then, where council records show new Certificates of Compliance have been granted for various renovations, that gets taken into account automatically for the relevant properties. However, if work was done on the property that did not require consent (such as for example adding a whopping 30m2 sleepout under the 2020 Building Code exemptions), the increase in the Improvement value may not get picked up.
The types of improvements that usually don’t require a consent and may get missed by the revaluation include:
· Adding decks and patios on ground level
· Sleepouts and carports under 30m2 under the new exemptions
· Significant improvements to retaining walls and drainage
· Sealing of driveways
· Installation of rainwater tanks or solar panels
· Installation of double-glazed joinery
A regulatory system assessment report released by LINZ in 2021 finds that one in five revaluations do not meet minimum standards prescribed in the Rating Valuations Rules 2008. In those cases, councils (or their contracted valuers) had to make adjustments and resubmit revaluations to the Valuer General for certification. Some of the common reasons for failing to meet the standards tend to be around:
· poor consideration of appropriate market sales evidence
· effects of re-zoning on land value and amenity
· rural land where regulatory changes affect economic benefit derived from land
If any of the above situations apply to your property, these can be useful grounds for an objection to the rating valuation.
Lodging an objection against a council valuation is free and can usually be easily done online. Individuals must provide evidence, however there is no requirement to provide a private registered valuation. There is flexibility around what sort of evidence can be provided. For example, in can be a free market appraisal from a real estate agent, information on recent sales in the area, information about zoning changes, or photos and measurements taken by the owner. Council’s valuers will usually visit the property on location, and sometimes may require access inside the property.
"An owner or ratepayer can request a new valuation at any time under section 16 of the Rating Valuations Act 1998."
It is not widely known that an owner or ratepayer can request a new valuation at any time under section 16 of the Rating Valuations Act 1998. In this case, the owner would have to pay the market price for the valuation. The assessment would be made for the point in time when the general valuation took place across the territorial authority area. This means that market movement since the last general valuation will not be taken into account. A request for a section 16 valuation must be made to the council inwriting. Once the valuation is completed by council, the QV website should usually be updated within a week. The reviewed rating value would not be used for rating purposes until 1 July.
Rateable values are not intended to provide property values for sales and marketing purposes. A market value of a house would include other factors such as desirability of a neighbourhood, chattels, interest rates and the cycle of the economy. Traditionally though, the CV or RV tends to be listed on Trademe Property; and depending on the cycle of the property marked agents tend to have a feel of where the prices are relative to Rating Values/Capital Values. Putting in some effort ahead of time to ensure the rating valuation is accurate is a chance to tidy up the loose paper work with council and put yourself in the best position to achieve highest potential market valuation when it’s time to sell.