Home Truths: How your property rates

Glenda Whitehead - valuer with Quotable Value

There's a common misconception that if a property's value increases so will its rates bill. But an increase in property value does not automatically lead to a rise in rates.

The rates assessed on your property are driven by three factors. The first is the council's expenditure budget. Increases in spending must be funded and a majority of this comes from the ratepayers. The second factor is the method used 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 or capital value (land plus house). If a council changes its method of apportioning rates or it seeks to change the proportion of the rates paid by the commercial ratepayers versus residential ratepayers, then these changes will lead to a change in rates.

The third factor is the property's value. As councils use property values as a factor to fairly apportion rates, then a change in a property's value can lead to a change in its rates. This happens when a property's value increases at a higher (or lower) level than the average for the area.

For example, if all properties' values in an area have increased by 30 per cent and the council made no change to their expenditure budget or their rates method, then every homeowner's rates bill would remain the same. But if the average change in property values is 30 per cent, and your property increases by 40 per cent, then you can expect a rates increase. If your property only increased by 20 per cent, you might experience a decrease in rates.

As most councils undertake a property revaluation only every three years it is common that all three factors impact on the setting of rates. When you receive your property's new rating valuation, the easiest thing to look at is whether your property has increased in value by more or less than what the council advises is the average change for the council area.

The other thing to take comfort in is that rates aren't just increased by the rate of increase in your property's value. So if your property has increased by 40 per cent this won't correspond to a 40 per cent increase in rates. If the average increase in property values was 30 per cent, then your property increasing by 40 per cent may result in only a small increase in your rates.

But most people are curious as to why a council's rating valuation does not always reflect a property's market value. The rating valuation is based on the property sales activity at the time of the revaluation and should closely reflect the market, however, the rating valuation doesn't include your property's chattels (curtains, appliances etc that may remain with a house when it is sold), so the rating valuation will always be slightly lower than the likely selling price. But the rating valuations are only a snapshot of the market at one point of time (eg September 1, 2005), and as the real estate market is constantly changing, the rating valuations won't reflect the market for long.

Whether you're happy with a new rating valuation or disappointed is often driven by whether you're looking to sell, or looking at the impact on your rates. But take comfort in the fact that if the whole market is moving upward by a similar level then your share of the rates bill isn't driven primarily by the increase in your property value.

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