With Auckland properties having three-yearly rating valuations deferred thanks to obstacles presented by the global pandemic, Auckland Council chief economist David Norman asks whether the current rating valuation system is ready for an overhaul?
Residential properties across Auckland were due to receive updated rating valuations in 2020, however, an ensuing global pandemic forced a rain check, with a new round of council valuations expected later this year.
The lag time has given some pause for thought as we ask whether a move to a land-based rating system could offer a clearer picture of value, making associated levies and payments fairer and more succinct.
WHAT IS A LAND-BASED RATING SYSTEM?
“Presently Auckland’s property rating system uses capital values (CVs) to determine the variable component of a property’s rates bill,” says David Norman, chief economist for the Auckland Council.
“This approach, while popular, and commonly used across the country, does not incentivise the most efficient use of land because people developing land to create new homes and ease supply issues are required to pay higher property rates.”
“This is because the more improvements a site has, the higher the capital value,” he adds.
Mr Norman explains that Auckland has a chronic housing shortage that has not abated with changing policy, economic disruption and the highest building consent numbers in recent years.
A land-based rating system would see taxes levied against the value of land rather than the value of improvements on the land.
Mr Norman says this has the potential to remove current disincentives to build while actively encouraging people that aren’t using their land in the most practical way to support population growth and help to deliver the homes Auckland so badly needs.
“The Mayor’s task force recommended examining the implications of switching to rates based on land value,” Mr Norman says.
“Similarly, the Chief Economist Unit at the Auckland Council has found a switch to a rate based exclusively on land value for residential properties would reduce rates for 56 per cent of ratepayers.”
“Meanwhile, those with highly valued land, who are not using it efficiently would see their rates increase, providing an incentive to use urban land better,” he adds.
Mr Norman explains that in moving from a capital value system we could remove out of date exceptions.
“Currently, homeowners using residentially-zoned land for horticulture or farming receive a discount of up to 20 per cent off their property rates due to the historic belief they do not use the same services.”
“But given infrastructure such as roading and sewerage is already in place, the logic is flawed,” Mr Norman says.
“Similarly, landowners around urban/rural boundaries are eligible for a 10 per cent discount because they are thought not to receive the same services urban communities do.”
“However, we find this is usually offset by lower land values,” he adds.
In their research, Mr Norman and his team at the Auckland Council Chief Economist Unit removed these provisions along with the Uniform General Charge (UGC) that is levied against all Auckland homeowners through the rating system.
They found that more than half of Auckland’s ratepayers would pay less on their rates bill.
“By collecting the same amount of money that is spread across residential ratepayers in a way that removes distortions, residential development would be incentivised and those holding land unproductively would receive a rate rise,” he says.
WHY IS DEVELOPMENT IMPORTANT?
Despite population growth virtually slowing to a halt in the face of border closures and the global pandemic, Auckland’s population has grown nearly 50 per cent in the last two decades, keeping property prices high while putting pressure on resources, public services and the number of houses available.
While the Auckland Unitary Plan has been successful in rezoning huge amounts of urban land for residential development, it has also sent property prices sky-high for sites with development potential.
“Rezoned land allowing greater densification continues to net premium property prices for sellers, however, it does not always deliver the desired housing,” Mr Norman says.
“Switching to a land-based valuation system would remove obstacles and actively incentivise these landowners to undertake vital development,” he explains.
MAKING IT WORK
While in the early stages of analysing how this process could work better for Aucklanders, Mr Norman says that slowly making the change over three to five years would ensure no homeowners suddenly wake up with a bill they can’t manage.
“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 land value.”
Mr Norman says Auckland’s land is a commodity that cannot be reproduced and international examples underpin the theory that taxing land rather than improvements incentivises development.
“Studies in Pennsylvania, 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.”
“In Auckland, this could easily be implemented to generate five per cent more housing supply,” he adds.
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 rewards those delivering the housing Auckland needs.