The valuation conundrum – not.


By Bryan Kavanagh and David Collyer
This week’s game-changer, the Property Taxes paper by Grattan Institute has a minor error on land valuation that needs correcting before it becomes a gift to the opponents of reform.
Grattan is acutely aware that on this topic they are treading ground with an illustrious history. They have travelled the long, hard way to learn the least-harmful taxes are on land and land-like bases.  We welcome them to the economic high ground, where we have been sitting all this time.
On valuations, Grattan CEO John Daley and Senior Associate Brendan Coates observed:

“A progressive (land tax) rate compounds the administrative complexities of taxing unimproved capital values; unimproved values are hardest to determine accurately where land values are highest, and hence the consequences of disputed valuations are worth more.


“The recent shift towards capital improved values for council rates in some states reflects difficulties in determining the unimproved value of land, especially in dense urban areas where there are few, if any, market sales of unimproved land.

It isn’t always easy to value central city properties in slow years with few or no sales of vacant sites, but a competent valuer will always be able to accurately determine the value of a site.
A locality with no sales evidence is a locality that doesn’t exist!

It’s usually barristers – as in NSW a few years back when a commercial objection to a site valuation went to the Supreme Court – and economists, who confect these alleged Site Valuation ‘problems’.  
Apparently, Westfield Doncaster contest their land tax valuation every year – it’s just good business practice, and will likely get them a tax cut.

Erudite professors of economics in the USA – usually with an anti-land tax barrow to push – claim land values can’t be split out from improved sales in densely built places, but valuers in Australia, New Zealand and South Africa have been doing just that for 120 years – in the case of Australia, producing a land value on every site. 

This is where the ABS gets their data on Australia’s total land value.

The ‘residual building value’ method, subtracting the depreciated value of the building from the sale price is one method, or the ‘hypothetical development’ method, where a vacant site is notionally developed to its highest and best use, then the cost of the buildings, borrowing costs (interest over the development period), and rates and land tax, etc., is deducted to derive land value is another.  

These methods are quite straightforward for experienced valuers.

The shift to Capital Improved Values (rating land and buildings) in Victoria might have reflected to a small degree the difficulty in CBD areas to come up with a land value (although the City of Melbourne prefers to rate on NAV rather than CIV, and the ‘hypothetical development’ method deals with the situation of insufficient sales evidence), but it is more likely a political move to advantage owners of  vacant or underdeveloped sites, where SV makes them play the game or sell.

Do not underestimate political influence, which has also interfered in the SV rating states of Queensland and New South Wales to levy “minimum rates”, the effect of which is to have owners of less valuable sites (on the minimum rate) subsidise owners of more valuable sites. The mayor of Gold Coast City Council, the late Ron Clark, actually boasted several years ago that some 80% of his municipality was on the minimum rate.

If Daley & Coates wants more information on land valuation, they could do no better than read Estimating Land Values by Ted Gwartney.   Just don’t let vested interests pretend the valuation process is hard or inaccurate.


  1. Paul Meleng20-07-2015

    Exactly so. It might be time for Australia’s excellent professional valuers to speak up and make themselves known. Their almost invisible profile is probably a direct result of their lack of controversy because the job is done so well.

    If I can remember the professional history I was told as a young Land Surveyor it included the knowledge that the most powerful official in Rome was the Surveyor General , which then would have included not only the identifying and recording of all land titles but the valuation of them as the main ( and possibly only) base of taxation. We have of course long since divided into specialist professions of Valuation and Surveying, but with a good shared understanding of each. Imagine trying to measure and tax “income” back in those days?

    What we propose is not new but very old, and it worked. It is not land values that are hard to measure well , it is “Taxable Income”, hence the massive waste of energy and intelligence that goes into just that.

  2. Leighton29-07-2015

    Good article. Australia is fortunate to have a pretty good valuation system and high levels of professionalism, despite the states all doing it a bit differently. That it is poorly understood is more a result of messy and compromised land tax and rating policies.

    And if people have a problem with their valuation it is easy and straightforward to challenge it.

    One only has to look at the UK for example to see what a mess a poor valuation system makes for. They cannot have any sensible discussion about property taxation when they have not undertaken a full valuation since 1991!

    Just on the City of Melbourne, it is required by law to rate on the NAV base. A few other councils in Victoria use NAV by choice, mainly due to the higher levals of rental occupancy.

    Once permitted, Victorian councils shifted to the CIV base quickly as it meant they could collect more rate revenue overall but by shifting the bulk of the increase onto (the fewer in number) commercial property and using the differential rate system.

  3. benj31-07-2015

    This whole valuation thing is a red herring. For a tax to be efficient it must only not be a % of income/capital or transactions.

    Which is why lump sum taxes are efficient, although not necessarily fair.

    A perfect LVT is both 100% fair and efficient. Think of it as a lump sum tax attached to a freehold property title. It’s the choice to occupy valuable land, thus pay the LVT, that makes it efficient.

    In other words an LVT doesn’t have to be 100% on each title for it to be efficient. Which is why the valuations do not have to be that accurate. As long as they are fixed and do not change as a result of capital improvements.

    Of course for fairness it’s best to have as close to 100% possible for each title. However, even if it is out by >30% (unlikely), it’s still going to be fairer than any other current tax, including a fixed % of selling prices.

    Mark Wadsworth shows a very easy root to collecting the bulk of the rental value of land.

    here page 5

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