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What is a Rating Valuation?

8 April 2009

Mandated by the Rating Valuations Act 1998, it is a requirement of Local Authorities to assess the value of all properties within their boundaries at least every three years, primarily for the purpose of apportionment of rates. They are known as rating valuations.

Of the 78 Local Authorities throughout New Zealand, 77 reassess the values every three years with only Wellington carrying out the assessments annually.

Rating Valuations were previously called Government Valuations.  Government Valuations were carried out periodically by the Valuation Department on behalf of the various Local Authorities.  The Valuation Department became an SOE in the late 1990's and was renamed Quotable Value.  Previously referred to as GV's, Rating Valuations are now referred to as RV's.  Some Local Authorities contract out Rating Valuation Assessments although the majority of assessments continue to be carried out by Quotable Value.  

How are the Values assessed?

In any given Local Authority the quantum of properties to be valued makes it logistically almost impossible to physically inspect and assess the value for each individual property.  To overcome this, a mass appraisal technique is utilised.  Therefore, only a proportion of properties are physically inspected, the number varying between Local Authorities.  For those properties not inspected (the majority) valuations are based on data held by the contracted supplier.  At actual valuation date, market and sales information is analysed to establish market trends for the various classes of property.  The results form the basis for assessing the new Rating Valuations.

How accurate is a Rating Valuation?

There is an incorrect perception among many participants in the property market that Rating Valuations are uniformly correct as an indication of market value (excluding chattels etc) at the valuation date.  This is not so.  Inaccuracies  and inconsistencies exist because few properties are in fact inspected, the values being assessed on a mass appraisal basis using multiple regression techniques. Statistical processes assessing values tend to have inherent inaccuracies.

The time factor is a critical one.  Where there is a three year gap between effective valuation dates, values often and normally become less relevant as time moves on from the effective date.  In a volatile market, any form of valuation can become out of date very quickly.  Many participants in the market often ask how much above or below the Rating Valuation are properties selling for.  This would be a reasonable question if Rating Valuations were accurate in relation to market value as at the effective date.  Statistics show that in many instances, it is very difficult to draw any robust percentage increase or decline, based on Rating Valuation data.

What do the figures actually mean?

A Rating Valuation will contain three primary figures being the capital value, land value and value of improvements.  These are discussed below.

Capital Value

The capital value is an assessment of the property's market value, being the amount that a willing seller can expect to get as at the date of valuation from a willing, prudent purchaser.  The value excludes any chattels, stock, plant, machinery, crops, plantation trees or goodwill.

Land Value

This is an assessment of the price that will have been paid for the land, as at the date of valuation. Importantly, the land value includes development work which may have been carried out such as drainage, excavation, filling, retention walls, reclamation, leveling, vegetation clearance, grading, fertility build-up or flood/erosion protection.

Value of Improvements

The assessed value of improvements is the difference between the assessed capital and land values.  It reflects the additional value given to the land by any buildings, other structures, cropping trees, vines and any landscaping that adds value to the land.

Rules & Regulations

Valuations are carried out in accordance with the Rating Valuation Regulations 1998 and the Rating Valuation Rules 2002.

The Rating Valuations Rules are issued by the Valuer General under Section 5 to 5C of the Rating Valuations Act 1988.  The primary purpose of the Rating Valuation rules is to ensure that there is a nationally consistent, impartial, independent and equitable Rating Valuation system that can be monitored and audited.  To that end the rules provide very clear requirements to Local Authorities to meet in undertaking Rating Valuations, recording and updating Rating Valuation information, and maintaining the District Valuation roll.

Under the Local Government Rating Act 2002, Councils have power to set, assess and collect rates to fund local government activities, using the Rating Valuations as part of that process.  Rating Valuations form only part of the overall process adopted by Local Authorities in establishing rates.  Any organisation contracted to undertake Rating Valuations must comply with the relevant statutes of the Rating Valuations Act 1998, Rating Valuation Regulations 1988, Rating Valuation Rules 2002 and the Local Government Rating Act 2002.  To ensure compliance, the relevant Local Authority and the company providing Rating Valuations are audited by the office of the Valuer General.  The Rating Valuation rules were reviewed in 2008, were gazetted on 21 August 2008 and only came into effect on 31 March 2009.  The Valuer General has encouraged Councils to take an active role in quality assurance with their Rating Valuation suppliers.

So what do Rating Valuations achieve?

Rating Valuations produced for Local Authorities form part of their procedure in establishing rates.  They provide a useful comparison between properties in an area.

How does a Rating Valuation affect Rates?

This depends on the rating system adopted by any individual Local Authority.  Most use a capital value or land value rating approach although some use the annual value rating system.  The capital value and land value rating system means that the Local Authority will use the assessed values as part of their rates assessment process.  The annual value system means that the process for assessing a property's rates will be based on either the income a property might generate in a one year period, or a percentage of the property's capital value.  Rates should only increase or decrease if the value that property increases or decreases at a rate greater than or less than the average increase or decrease across that Local Authority.

Comments

The Rating Valuations Act, in conjunction with the Rating Valuations Regulations and Rating Valuation Rules form legislation which ensures that Rating Valuations are carried out suitably for their intended purpose.

Rating Valuations should not be interpreted as market valuations.  The major shortcomings are the often shortage of up to date data specific to any particular property, the mass appraisal technique used to assess value, and the fluctuations in values due to market conditions subsequent to revision date.  Organisations undertaking Rating Valuations set out to provide an assessment that reflects the market trends but which also maintains relativity between properties.  Rating Valuations therefore do not reflect the "individuality" offered by any particular property.  Such individuality may be positive or negative, and can have a significant effect on the actual market value.  Caution must therefore be exercised in using Rating Valuations in any property decision including purchase, sale, security, etc.  Accurate and up to date market valuation advice requires a full physical inspection, research and analysis of pertinent market information and sales data, and appropriate valuation methodology specific to the property type to ensure the most accurate valuation assessments can be obtained.

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.