Reliance on CVs ill-advised

Nearly half of Auckland investors believe the Council CV on their property is incorrect, new Crockers research shows – but are CVs reliable anyway?

Thursday, October 8th 2015, 4:17PM

by Miriam Bell

Almost all of the participants in the latest Crockers Property Investment Index survey had examined their investment properties’ most recent CV.

Nearly a third (30%) thought their valuations were too low while 17% thought their valuations were too high.

And many had challenged their valuation.

But is it a good idea to rely on CVs – which are intended to help councils calculate rates - as an indicator of property value anyway?

New research from the Auckland University Business School's Department of Property suggests that CVs are poor indicators of value and that using them as such distorts the market.

Professor Deborah Levy and her colleagues Dr Zhi Dong and James Young conducted a number of studies, and also analysed 995 Wellington property transactions over a four-year period from 2007 to 2010.

Their research, which will now be published in the prestigious UK journal Housing Studies, showed that CVs significantly influence the behaviour of both buyers and sellers.

Levy said the data they analysed showed a significant a fall-off in sales activity in the period leading up to the CV revision date.

Following the release of the new valuations there was then a significant surge in transactions.

"This extremely low transaction volume within the 100-day window between valuation and the release of the values implies that market participants take into account the CV when buying/selling a property, waiting for the updated CV before making a decision.”

The behaviour was particularly pronounced in a rising market - and it serves to influence the market, Levy said.

Yet councils calculate individual property CVs using a computer algorithms which analyse recent sales in the neighbourhood.

The condition of the building and the quality of any improvements are not taken into account.

Further, the long period between assessments, and a lag between gathering data and processing it, mean that the valuations are usually out of date.

Levy said the problem of people relying on CVs is caused by the lack of relevant valuation information available.

While the Government does collect such information, it is sold to CoreLogic and is not freely available to the public.

“The United States and Europe are beginning to make more of such data available because they saw that a lack of it was one of the factors cited as leading to the housing bubble of 2004.”

The widespread tendency to compare selling prices with CVs aggravates the problem even more, Levy said.

“Some time ago we found evidence that a number of people in Auckland were pushing for the CVs on their properties to be increased because they were using them for marketing purposes.”

However, a psychological tendency known as “anchoring” means the reliance on CVs as property price guides can’t be easily undone.

“Anchoring” occurs when the most widely available information is given undue weight in decision-making.

As a result, a better approach would be to stop the practice of linking CVs with individual properties, Levy said.

For example, in England and Wales, properties are placed in “price bands”, according to their location and size characteristics.

“If individual properties in New Zealand were similarly grouped in banding categories, then the government valuation would become a range of values rather than a more psychologically definite value for a particular address.”

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