Why you can’t use council rates notice valuations when assessing a property’s worth

Prospective buyers will often refer to the council valuation when setting a bidding limit for a property auction, but this is not a reliable indicator for likely price.

In fact, I’ve seen remorseful bidders regretting their price-setting methodology when they’ve watched the bidding (and reserve) sail past their council rates valuation figure.

In the vast majority of cases, properties sell for a far greater figure than the council rates notice amount.

So, why does this occur? And why is there such a discrepancy between bank valuations and council valuations?

In Victoria, for example, rates notices are issued by the local council and are usually based on an algorithm calculation or a basic indexation.

“Each year, all rateable properties are revalued with a valuation date of 1 January. Council rate and valuation notices are typically issued between July and September each year. The valuation included in the notice will refer to the valuation as of 1 January of that year.” (Source: land.vic.gov.au)

We all know that a certified valuer doesn’t typically walk through our property each year, and economically this wouldn’t be feasible for our local councils anyway.

Again, more from the Victorian Department of Planning.

“The Valuer-General or municipal councils will determine the valuation of a property as part of the annual general valuation process. Once a general valuation is completed, councils receive the valuations to calculate the rates that landowners pay.

“Councils can also adopt a system of differential rates based on CIV, (capital improved value) or NAV, (net annual value).

“Differential rates are used to apply a different rate in the dollar to separate classes of property. Classes may include residential, rural, or commercial properties.

“Councils also collect the fire services property levy on behalf of the State Revenue Office. This levy is included in a landowner’s rates notice.”

Capital value or market value?

Capital improved value is the figure that most people look at, and it is this figure that can throw a lot of buyers when they are scanning through a contract of sale.

The capital value of a property is almost always different from the market value of a property.

If our council rates notice stated a valuation that was higher than the market value, they would be faced with objections from ratepayers constantly. In almost every case we’ve witnessed, the council valuation has fallen substantially short of the market value of the property.

Take for example these two recent sales in separate local government areas.

This townhouse in the local government area of the City of Maribyrnong sold at auction with competitive bidding for $1,511,000. The capital improved value applied as at 1 January 2024 was 21 per cent below the market value.

And this unit in the LGA of the City of Merri-Bek sold recently for $889,000, some 19 per cent below market value.

It is important to note that while council valuations are all sourced by the Valuer-General, the level of rates per dollar of value is unique to each local government area.

Individual councils determine how they will apply the rates and tax their landowners.

For example, if we compare each of the above two properties, we can see that the council rates surcharge for Maribyrnong residents is higher than that of Merri-Bek residents based on the rate per capital improved valuation dollar.

Landowners can challenge their valuations if they feel they are too high, but they cannot challenge their rate surcharge.

Understanding council rates notices (and valuations) is important, particularly when working out what information not to rely on when determining market value and likely selling price.

Buying a property is a significant journey for most buyers and appraising the property prior to making an offer (or bidding at auction) is essential.

Nobody wants to overpay, and nobody wants to miss out on the property for a fair price that they could have paid. Appraising property is no mean feat, and it takes focus, research and can be quite intricate. But surely, when the stakes are so high, it’s a worthwhile exercise.

Relying on a council rates valuation is not only lazy, but it’s been proven to be highly unreliable in the majority of cases.