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Are we valuing property properly?

Tags: Residential Residential Views

With research finding that 59 percent of residential property owners could pay less in rates, Auckland Council’s chief economist David Norman explains why it might be time for a change to our rating valuation system.


Research by the Auckland Council has found that more than half of Auckland’s homeowners could save around $467 on their rates bill on average if we moved to a land-value-based system for rating valuations.

Charged with providing objective, even-handed advice on policy and infrastructure, the Chief Economist Unit at the Auckland Council has been researching why a move away from the current capital valuation (CV) system could better benefit Aucklanders.

“Auckland has a housing shortage that has not disappeared with COVID-19 disruption, and it’s vital we use the land we have in the most efficient way possible,” says Auckland Council chief economist David Norman.

He says a change to the way we value residential property for rates purposes has the potential to encourage development, and even the playing field for Auckland’s homeowners by removing out-of-date exceptions.

Population pressures

With a population that has grown around 46 percent in the last 20 years, there’s been significant upward pressure on housing across the Auckland region, which has kept prices high and availability of stock low.

In answer to the city’s housing shortage, the Auckland Council enacted its Unitary Plan Operative in-Part (AUPOP) which saw huge amounts of land rezoned to create developable greenfield space to provide more housing for an eager community.

“The AUPOP massively increased how much certain property owners were able to develop land, and what we saw was land values increase according to development potential,” Mr. Norman says.

“This amounted to a big windfall for property owners, but has not always delivered the housing to go with it.”

Presently, the Auckland Council uses a CV system to collect property rates calculated by adding a property’s land value (LV) plus improvements (dwellings, fencing).

However, Mr. Norman says if you decide to develop your site by adding townhouses for instance, you will be liable to pay more tax and thus be penalised for using land more efficiently.

Land-based valuations

“Land taxes – taxes that only use the value of your land, remove the current disincentive to build, actively encouraging people who mightn’t be using land in the most practical way to help deliver the houses Auckland needs,” Mr. Norman explains.

He says in moving from CVs to LVs three idiosyncrasies would be removed.

“Currently, homeowners that use residentially-zoned land as an orchard or farming are given a discount of up to 20 percent off their property rates because it was thought they didn’t use the same services – but with infrastructure already in place, the rationale here is flawed,” Mr. Norman says.

“Similarly, homeowners in residentially-zoned but more rural areas are given a 10 percent discount because they don’t receive the same services urban areas do, yet this is usually already reflected in lower land values.”

Mr. Norman’s analysis removed these anomalies along with the Uniform General Charge (UGC) which sees a blanket $440 charged to all of Auckland’s homeowners.

“If we collect the same amount of money as we currently do, but spread this across residential ratepayers in a way that removes distortions, we have found that 59 percent of ratepayers would pay less on their rates bill,” Mr. Norman says.

“The smaller number of people with substantial landholdings that aren’t used to full potential, such as land bankers, would receive a rate rise,” he adds.

Implementation

Given that the three-yearly rating valuations due to be completed this year have been deferred to 2021 in the wake of market disruption, Mr. Norman says there is an opportunity to set change in motion.

“We are in the very early stages of analysing how this process could work better for Aucklanders, but slowly making the change over a phasing period of three to five years would ensure no homeowners suddenly wake up with a change they can’t manage,” he says.

“By slowly scaling down the role of improvements over time, we expect that after five years we would have moved to a rating valuation system solely based on LV.”

Mr. Norman says that land is a commodity that cannot be reproduced and international examples suggest that taxing land rather than improvements incentivises development.

“Studies in Pennsylvania, the United States, where there is a disaggregated system of local governments each with systems for taxing land, have proven statistically that taxing land value incentivises greater development,” he says.

“In Auckland, this could easily be implemented to generate five percent more housing supply.”

Land, rather than improvements, he says, hold extreme value across the Auckland region and taxing them appropriately would result in a fairer, more just system that rewarded those delivering the housing Auckland needs.

More detail on this topic is available here

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