demystifying rating valuations
Why have some Rating Values increased in a declining market?
This is a common area of confusion for property owners at present. There is an abundance of media coverage with statistics showing the market is now in decline. So why have Rating Values in some areas shown an increase?
It is important to look at the timeframe that each piece of information relates to. Published statistics often report on the change in market over the previous 12 months. A rating valuation is undertaken on a three year cycle, so its change relates to market movement over a three year period.
Rating valuations undertaken this year and recently released on average have shown increases. This is due to the market decline in the past 12 months not negating the increase experienced in 2006 and 2007.
This pattern is demonstrated in the hypothetical graph below:
How do property values affect rates?
There is a common misconception that if a property value increases then so will the rates bill. However, an increase in property value does not automatically lead to a rise in rates.
The rates assessed on your property are driven by three key factors.
The first is the Councils expenditure budget. Increases in the councils spending requirements must be funded and a portion of this funding comes from the ratepayers in the council area. If the expenditure budget goes up, this is likely to lead to an increase in rates.
The second key factor is the method the council uses to split the rates collection. Some costs are spread uniformly and the same charge is set per property. Other costs are apportioned on a factor like land value, capital value (land plus house), or annual value (rental). If a council changes it’s method of apportioning rates or it seeks to change the proportion of the rates collection that is paid by the commercial ratepayers compared to the residential ratepayer, then these changes will lead to a change in the rates a homeowner must pay.
The third key factor is your property’s value. As councils use property values as a factor to fairly apportion rates, a change in your property value can lead to a change in your rates. This can happen when your property value increases at a higher (or lower) level than the average for residential properties in your area. For example, if all properties values in an area have increased by exactly 30% and the council made no change to their expenditure budget or their rates method, then every homeowner’s rates bill would remain the same. If the average change in property values is 30%, and your property increases by 40%, then you can expect to get a rates increase. If your property only increased by 20%, you might experience a decrease in your rates.