26 Nov 2020

Peter Thompson, Managing Director, Barfoot & Thompson

With house sale prices reaching record levels nationally, vendors and real estate professionals are presented with a challenge at present in determining the price at which vendors should seek to sell.

Naturally, the vendor wants to obtain the best price possible, and it is the real estate agent’s professional responsibility to achieve this on their behalf.

However, establishing just where the ‘sweet spot’ of best price is without putting off buyers is an art form rather than a science.

Incredible buyer demand and prevailing mortgage interest rates, at never before experienced low levels, are undermining the reliability of methods normally relied on for establishing a selling price.

These normal methods include formal, house specific valuations; the Government mandated valuation system councils use for rating purposes (called capital, rating or market valuations); and real estate agents’ recommendations based on their expertise and the recent selling price of properties in the same vicinity.

Ultimately, the real price a house sells at is the price someone is prepared to pay, and that is best established at auction.

When two or more people are competing to buy a property, it can lead to the sale price being well in excess of its theoretical value. Alternatively, if a property lacks appeal, its potential value may not be achieved as not all buyers are attracted by potential.

Currently, the market is acting contrary to the expectations of economists and commentators. Rather than being constrained by the economic uncertainty created by Covid-19, the market has pushed forward to the point where we are seeing new highs set in terms of prices and turnover.

There is no indication that new or additional regulations from central government or the Reserve Bank are imminent to provide a handbrake to market activity.

If there is any slowing down of demand it is likely to be the result of trading banks being more cautious about borrowers over extending themselves.

What is becoming increasingly obvious is that looking at local authority valuations as a guide to setting a selling price has minimal value. To understand why this is we need to look at the purpose for which these valuations are intended.

Their purpose is to enable a local authority to apportion their rate levy fairly across their housing stock. The ‘value’ is computer generated and a key input is the movement in house price sales locally. The valuations are revised every three years.

The valuation has two components – the land value and improvements (dwelling) value. The land is invariably more valuable than the dwelling.

Due to Covid-19, the three-yearly valuation cycle due for release in 2020 was deferred for 12 months. This was signed off by Government at the time because there was concern prices would fall and the valuations would be unreliable. The opposite has occurred, and the valuations are way behind where prices are now sitting.

New values will now not appear till late 2021 meaning by the time they are published next year existing valuations will be four years out of date.

For rating purposes this is not a problem, but for those who want to use them as a rule of thumb guide to potential selling price they are hopelessly outdated.

Compounding this issue in Auckland is that in mid 2018 the Council adopted an updated unitary plan, and this permits significant changes to large areas of residential land by allowing greater density and building heights. This plan has significantly changed the value of the land on which many houses sit.

Until new local authority valuations are issued in 12 months’ time the local authority (capital, market or rating) valuation will remain of minimal relevance.