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Benchmarking to CVs is wrong and damaging, says Alistair Helm. He gives five reasons

Posted in Property

By Alistair Helm*

I doubt that there would ever be a conversation between an agent and a prospective buyer of a property without reference to the CV of the property.

It is judged by most people in NZ to be the “official” valuation of the property, almost as though the government (local or national) should provide such a service. At least that is what buyers and sellers tend to think.

The fact is there is an argument that in NZ the whole property industry would be better off without a CV for individual properties.

It would at least reduce the proliferation of media stories featuring references to selling prices measured against the CV of which there would be almost a daily flood.

Such stories only perpetuate the myth that because a property sold at a price 20% / 50% / 100% above “its CV” there must be grounds that all properties are rising in price by 20% / 50% / 100%!!

You look overseas and find that in almost every other country there is no such number for an individual property. You will get the local council rates assessment, the local government tax, the capital value of the land or the rentable estimation for the property, but never an estimation of valuation.

Let’s be very clear here to ensure complete clarity the Capital Value (CV) is based on what a property is used for (land use) and the rateable land value of the physical land the property sits on.

Quotable Value New Zealand (QV) is the agency contracted by Councils to assess property values, and it reviews these valuations every 3 years. Some Councils state that the CV is an estimate of the probable selling price of the property as at the effective date of valuation, others steer clear of such assertions.

QV states on its website that; “Formerly called Government valuations (GVs), council rating values (RVs) are compiled by statute, under the Rating Valuations Act 1998, mainly as a uniform basis for levying local and regional council rates. Rating values also serve as a useful guide for property owners and other interested parties, as they are impartial and independently assessed as at the same date for every property in a Local Council.

A Council Rating Value (RV) comprises 3 main components:

The Capital Value (CV) which 
is the assessment of the probable price that would have been paid for the property if it had sold at the date of the last general revaluation.

The Land Value is the probable price that would have been paid for just the land as at the date of valuation.

The Value of Improvements, which is the difference between the capital and land values. It reflects the additional value given to the land by any buildings, other structures or cropping trees and vines present on the property, and any landscaping that adds value to the land."

The CV is in my view misleading and potentially damaging to the process of real estate.

Here are the reasons for this assertion:

1. It is a computational figure; no human is generally involved in its assessment. It is arrived at by the use of a computer algorithm that analyses recent sales within a geographical radius of the property in question. The pairing of such properties is based on property and section size. The process though takes no account of the condition of the property, the quality of improvements to the property aside from any general lodged building consents.

2. It is assessed on an infrequent basis (3yrs) and therefore is almost always out of date. The CV’s for Auckland for example were published in 2011, the prior CV’s were published in 2007 or 2008. The work to compute the CV is undertaken months before publication and is based on sales data in the months running up to the computational so the Auckland CV’s are based on sales in mid to late 2010. So thereby the references in Auckland are over 3 years old and the property market (and general economy) are vastly different to 3 years ago.

3. The true market value of a property is the value assessed as between two private parties; that being a willing seller and a willing buyer. It may well be that the accepted price between these two private parties has no bearing on either the council valuation or even a valuation by a qualified valuer. That is just a fact of the market.

4. Having a CV for a property becomes a crutch for the real estate industry that does nothing to add value to their services. Imagine for a minute if there was no CV. A real estate agent would use skill and local knowledge to assess recent sales, ensuring that local knowledge could ensure that truly comparable properties were evaluated in order to come up with an intelligent estimation of the true market price. Instead almost in defence of real estate agents they have to start with the CV and then justify why that is not the “market expectation”, or as is more likely today why the price expectation = CV +25%!

5. Without CV’s for properties we might actually get more property advertised with a price indication. At present around 30% of all property being marketed for sale in NZ is without a price indication, in Auckland that total is closer to 50%. Because of this fixation of the CV being a “market indicator” and the lack of confidence in agents to the true value, property is marketed without a price. This situation is unsatisfactory for buyers who stumble around in the dark unsure if their favourite property is within their financial means.

Putting a price on a property is not the same as a price ticket on an item in the shop – it is an indication of what the vendor (in consultation with their agent) considers the property to be worth. They as the vendor know that they may have to accept an offer below or maybe above that price. They are never forced to sell and can refuse an offer that they feel does not match their expectations; simply put they need to be that ‘willing seller’.

The epitome of what I consider the ridiculous situation with comparisons to CV’s and benchmarking to CV was seen in a recent advert by a local real estate company. They advertised how much more than the CV they had achieved.

The data is meaningless, there is no correlation between the actions of the agent and the sale price above CV. Selling price over and above a professional valuation maybe; a speedy completed sale certainly; a competitive bidding situation absolutely; but not the benchmark of the CV.

Clearly it is highly unlikely that NZ will change the system of CV’s providing a basis for assessing local rates. I just wish that there was less focus on the CV and more on the local market of truly comparable sales stats presented by professional local agents to help buyers fully understand the true vendor expectations, and thereby bring greater transparency to the property market.

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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here ». You can contact him here »

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20 Comments

Try telling that to a

Try telling that to a government that stole a good portion of the 8500 red zone homes some at hundreds of thousands of dollars below market valuation...

I've been saying this for

I've been saying this for years - ever since a UK-based buyer bought a beachfront house in my neighbourhood for WAY over the price any sensible Kiwi who understood the market would have paid.  As a result QV revalued the entire neighbourhood - sending our rates sky high of course.  Ludicrous.
 
Homeowners responded, of course, by trying to 'cash in' on the windfall gain .. only problem was there weren't enough UK (or other) overseas buyers - and many properties remained on the market for years and years at these inflated prices.  In the mind of homeowners - selling below CV (and it would have had to be WAY below) was almost a crime against the neighbourhood!
 
Yep, lots more properties would exchange hands if there were no CVs. And its still commonplace today. Looked at a property a few weeks ago. In need of a total modernisation/update/maintenance overhaul. REA asked me what I thought it was worth - I said start with the CV and deduct the cost of bringing it up to scratch (say, $100K). She laughed, saying if she advertised at that price buyers would be falling over her to buy it. I agreed and said, well doesn't that tell you something - that's its true market price!!!!!!! 
 

That re-inforces the fact

That re-inforces the fact that prices are set at the margin. One transaction sets the threshhold price from that point on. Contrary to those who refute the view that a few overseas buyers are pushing prices up - they're buying residency at any cost. The price they pay for a property is coincidental. Merely the price of entry.

I have heard it said real

I have heard it said real estate agents will recommend elderly couples sell at a level close to the cost of purchasing a local retirement home option irrespective of a significantly higher GV level that determines current rates expenditure.

Therein lie a real problem

Therein lie a real problem going forward - many homes built in the 50s-70s and even 80s and 90s have CVs only close to (and in may cases under) the cost of one of the independent villas/apartments in the corporate retirement complexes. Hence, those elderly property owners who haven't done a lot of maintenance can't 'afford' to drop their prices below CV, as often any lesser amount won't buy them a place in the local retirement village.
 

Anything preventing real

Anything preventing real estate agents and sellers from pulling prices out of their arses has to go, as far as those groups are concerned.
Of course, it should be remembered by everyone concerned that CVs already tend to grossly overestimate the value of a crappy wooden box poorly built from the cheapest of materials on some miserable patch of dirt.

Agree.   One of the most

Agree.
 
One of the most pernicious aspects of the whole housing unaffordability issue, is the way that increased costs somewhere (generally caused by dopey TLA staff carrying out their interpretation-du-jour of badly written CG laws, but let;s not dwell on this), promptly spill over into asking prices for faraway, differently maintained, and fundamentally dissimilar properties.
 
The entire CV process aids and abets this spill-over.
 
If stopped, and RV only used, the diffusion of inflated costs and values would be slowed.
 
If LV only were to be used, we'd still have the issue of inflated (by MUL's, RUB's and land-bankers) land values, but an LV basis for rates is quite close to the fabled Land/Asset tax desired by some.
 
Trade-offs......but that economic spill-over effect is the real worm in the apple.  Which, as one would expect, TLA's and their staffs are completely oblivious to.....so much for Economic Well-being....

5. Without CV’s for

5. Without CV’s for properties we might actually get more property advertised with a price indication. At present around 30% of all property being marketed for sale in NZ is without a price indication, in Auckland that total is closer to 50%. Because of this fixation of the CV being a “market indicator” and the lack of confidence in agents to the true value, property is marketed without a price. This situation is unsatisfactory for buyers who stumble around in the dark unsure if their favourite property is within their financial means.
 
Isn't the trend towards auction sales the reason houses are advertised without indicative pricing?
 
Furthermore, a seasoned property commentator previously told us that it took 25 hours of real estate agent time from listing to final bid to sell under such a method - the carded 4% selling fee on $555,000, the average AKL sale price, equates to $888.00 per hour.

Why can't data on house sales

Why can't data on house sales be freely available? How much does it cost the Govt to administer a website? The rationale (against) seems to be privacy (you don't snoop on nieghbours). Yet it all plays into marketing and manipulator hands?

S'already there, bucko.  Ya

S'already there, bucko.  Ya pays a few pesos to QV, ya gets a Nearby Sales etc report.  ,  Ya just needs them few pesos....

Gotta keep the mushrooms in

Gotta keep the mushrooms in the dark
Or, maybe powerdown was generous in giving the media an "F"
The biggest game in town and they dont want ya to know
 
In AU they can't wait to get Saturdays auctions results in the press, printed and online
http://www.domain.com.au/public/apm/saleshistory/default.aspx?mode=buy
http://www.domain.com.au/public/saleshistory.aspx?searchTerm=3191&mode=buy
All for free

Westpac did launch this Home

Westpac did launch this Home Club tool (http://www.westpac.co.nz/home-loans/homeclub/) last year that includes QV valuations. More here - http://www.interest.co.nz/property/60882/westpac-taps-kiwi-property-obse...

have you tried using that

have you tried using that home club tool?  I tried it.  Hard work for little result

The C.C.C kept liquifaction

The C.C.C kept liquifaction under ground prior to the quake (talking about the only map on line).

Bring in land taxes and there

Bring in land taxes and there will be amuch more attention to currrent values.

I think if they are going to

I think if they are going to do C.V 's they need to be more accurate. Some properties have been getting away with rediculously low C.V's and paying lower rates, while other have C.V's that are too high for the property.

Take the CV , add 10 to 20%,

Take the CV , add 10 to 20%, there's your market price. Even the commercial valuers do this. Unless its an unusual property, or completely unrennovated. 

Sorry mortgage belt but that

Sorry mortgage belt but that is rubbish. I don't know a single valuer that takes that approach. CvS are a useful distraction but add little weight to a registered valuation. Maybe I'm hanging with the wrong crowd though. At any rate, the cv comment is usually the first from a buyer in regards to thier price. Try asking them if they've done a yield analysis and watch thier eyes glaze over

In Auckland next year the new

In Auckland next year the new CV's will come out - these 2014 CV figures will be at least 30% to 40% up on 2011 and up will go the rates bills, followed by rent increases. The government, EQC and insurance companies have done quite nicely out of the CV system in Christchurch.

Every house I've sold

Every house I've sold (&owned) has sold at roughly CV + 10-35%. Coincidence? 
One variable also is: some owners actively 'object' and lobby their CV up.  While some long owners who have never objected or improved much have a languishing CV.