What role does CV play when buying or selling a home? What does the council's valuation delay mean?

What exactly is CV?

Every three years, property owners receive a letter from their council advising them of their home's latest CV.

CV calculations take a range of factors into account at a particular point in time, including property type, size, location, land, zoning and alterations or improvements.

Registered valuers calculate CVs using recent sales data to compare similar properties, combining technology with their professional experience.

Valuers sometimes inspect the exterior of selected properties, or check properties that have recently sold or received building consent. However, they do not view every property, let alone inspect its interior.

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CV—what purpose does it actually serve?

James Wilson, director of valuation and innovation at OneRoof's data partner Valocity, believes there is widespread misunderstanding, and even a lack of understanding, about what CVs really mean.

“Council valuations are not intended to establish a property's market value.

They have just one purpose: to help councils determine the basis for levying council rates on properties.

Should buyers or sellers use them as their sole reference point? The shortest answer is no.” He therefore considers CVs meaningless in property transactions.

In practice, buyers and sellers should not pay much attention to a property's CV at all, unless they are unfamiliar with the industry.

“Property professionals such as valuers, agents and lenders understand very well what CVs are used for and generally do not include them when assessing a property's market value.

But it may be different for people outside the industry who are planning to buy or sell a property,” Wilson said.

Rupert Gough, chief executive of mortgage company Martgage Lab, takes a less extreme view. He believes there are historical grounds for people paying attention to CVs in property transactions, chiefly because CVs were once used as a benchmark for offers.

 “Five years ago, we relied on CVs far more than we need to today, because back then this was the value we had to refer to.

Today, however, we can readily access up-to-date information on recent property sales in the relevant area, giving us a more accurate indication of market value.”

Gough also noted that CVs can confuse first-home buyers. “Property advertisements usually list the property's CV.

This can confuse prospective first-time buyers, because the CV may be completely different from the actual sale price. It is a very unsuitable market benchmark because, in many cases, it simply does not reflect reality.”

 

An incomplete reflection of a property's value

Ray White real estate agent Regan Golding said interested buyers often ask about a property's CV, but she usually tells them not to take it too seriously.

“In our experience, properties we sell often go for prices both above and below their CVs, so there is no need to focus too much on them.

Sometimes a CV can offer buyers some guidance and confidence about affordability, but ultimately our advice is still not to place too much faith in it.”

This is because CV calculations are based mainly on physical data such as land area and building floor area.

They are calculated entirely by computer rather than manually, which means they may not account for alterations and improvements, such as a newly renovated kitchen or landscaped garden.

Furthermore, although a CV is considered the figure closest to the property's market sale price, or the bare land's sale price, at the valuation date, it cannot represent a particular property's actual market value at any given time in a constantly changing market.

By law, CVs are updated every three years. How could the latest CVs, released in the middle of 2017, accurately reflect homes' true values in today's market?

“In fact, you really don't know what your property is worth until it is officially listed and buyers start making offers,” Golding said.

 

Clear figures in uncertain times

However, with considerable uncertainty in the current market, homeowners want some definite indication of their property's value. It is therefore unsurprising that CVs, as relatively authoritative figures, have attracted renewed attention.

Yet despite numerous predictions that COVID-19 could cause a property market crash, there has so far been no concrete evidence of such a trend.

“Initially, we found that people were very worried,” Golding said.

“But I don't think COVID-19 has had any impact on sales at all.

Sale prices are always determined by supply and demand, and in the current property market, buyer demand still far exceeds the number of properties listed for sale.”

Commenting on this, Wilson suggested that what may lie ahead is a change in the performance of individual submarkets, rather than an overall property market crash.

“For example, Auckland's apartment market has already begun showing signs of slowing, causing prices to soften. But across Auckland's property market as a whole, the combined indicators have barely changed.”

Gough believes the property market has not been significantly affected by the pandemic because confidence differs from that during the global financial crisis in 2008.

“During the global financial crisis, there was a widespread lack of confidence in the market. So far this year, people who feel confident they will keep their jobs are still looking for suitable properties to buy and are prepared to pay high prices.

Of course, economic conditions could turn around, but low interest rates and the removal of LVR restrictions provide a substantial stimulus to the property market. As long as their jobs are secure, people remain confident.”

Conducting CV revaluations next year may be fairer

If CVs do not directly affect property transaction prices but can give owners relatively clear evidence of their property's value in uncertain times, why does Auckland Council want to delay revaluation by a year?

Let us return to the sole purpose of CVs: helping councils determine the basis for levying council rates on properties.

Wilson said: “Despite people's optimism, there has not been enough evidence since New Zealand's COVID-19 lockdown to make a clear prediction about the country's economic outlook.

By delaying CV revaluations by a year, Auckland Council will be able to gain a better understanding of the property market's response.”

Meanwhile, “delaying it by a year can also produce a fairer outcome for ratepayers.

After the shock of COVID-19, the property market may look very different. That remains unclear, and ratepayers' interests should not suffer as a result.”