You may have noticed that the latest round of Rateable Valuations (RVs) have been released, three years on from the last review. But what, exactly, do RVs mean for the homebuyer and homeowner?
For some the new RVs bring a cry of frustration at the prospect of potentially having to pay higher rates, for others it’s of joy that their property is now worth more, and for others still, it’s of fear from seeing their RV stagnate or perhaps, dear I say it, regress.
Are the reactions above valid? And how important are RVs when buying and selling property?
Firstly, let’s paint the back-story by considering what the council looks at when calculating your RV.
How is your rateable value calculated?
The RV (also known as capital value or government valuation) is the probable price that would be paid for the property at the valuation date. It’s the total of both the land value and the improvements value.
Land value is the probable price that would be paid for the bare land at the valuation date. It includes any development, such as drainage, excavation, filling, retaining walls, reclamation, grading, levelling, vegetation clearing, soil improvement, or protection from erosion or flooding.
Improvement value is the difference between the RV and the land value. It reflects the value of the property’s buildings and other structures.
For more on the components that make up your valuation click here [http://wellington.govt.nz/services/rates-and-property/rates/rates-explained/how-rates-are-calculated].
Importantly, the RV doesn’t include chattels, stock, crops, machinery or trees. Plus, residential values include GST; all other property types do not. From calculating your RV, your local council will then set your rates bill. So, it is true, an increase in RV will lead to an increase in the rates you pay.
How do rateable values affect sale prices?
We have seen it time and time again, the RV on an advertised property is in your price range, but then you miss out as it somehow skyrockets 30 per cent over your budget. How can this be?
In brief, a property is worth what someone will pay for it. Purchasers decide what a property is worth by the offers they make, which are derived from their own calculations (scientific or otherwise) and their own emotions towards the property.
It would be very hard for council rateable valuations to consider all the unique calculations made by each individual potential buyer for each separate property. Instead the RV makes a broad stroke of neighbourhoods and areas. Properties are not visited individually and, therefore, potentially not completely understood. So, as a rule, you should only use the rateable value in combination with other information, like your own experience and research or a registered property valuation.
Do banks care about rateable values?
If you have a 20 per cent deposit (or equity in existing property) and you’re wishing to purchase above the RV, there is a high chance the bank will accept without you having to pay the $500+ for a full valuation (note: there are other criteria for property acquisition).
This is great news, so long as the RV is high enough to borrow against! With less of a deposit, often the bank will condition for a registered valuation (different to the rateable valuation) to determine whether they will grant you a loan.
So, to conclude, RVs need to be taken with a grain of salt when it comes to determining a buying price. But they can be a helpful guide or at least a starting point from which to commence your education of property value.
Lance Shearman is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request