Higher capital values: Are they worth the price?

Abstract

The bigger the capital value (CV) of your house the bigger the rates bill. In New Zealand CVs are set every three years and provide a basis for levying rates at the local government level. At the time of general revaluation, some property owners appeal their CV. Intuitively such ‘objections to value’ would aim to lower housing taxes. However, two-thirds of objectors in Auckland City proclaim their houses are under-valued. This behaviour can partly be explained by the fact that CVs are readily available and are widely used as a ‘market price indicator’. Property sellers sometimes use the current CV in marketing efforts for their properties and CV becomes a reference point in buyers’ decision making. Due to such abnormal market activity, a recent evaluation was commissioned by Land Information New Zealand to investigate whether or not CVs and objections are being used as intended. For instance, anecdotal evidence suggests that sometimes CVs are being manipulated to influence objectors’ house prices when real estate agents advise sellers to object if they feel their property's value has been set too low. The aim of this study is to understand if successful CV appeals affect prices of objectors who sell their properties. A detailed examination of the 2008 objections data uncovered that objectors’ houses tend to have a higher than average CV and a further spatial analysis identified “hot spots” - clusters with high proportion of objections. To test price impacts, I use residential sales transactions for Auckland City between Q3 2008 and Q3 2010 and identify properties whose owners objected in 2008. Contrary to the anecdotal evidence, the empirical results indicate that neither type of CV manipulation –reduction or increase – is found to have a statistically significant effect on sales prices.