We still seem to believe that the CV or Capital Value of the property is the benchmark by which we should judge property prices. Such was the focus on the Campbell Live article this week when judging the rights and wrongs of the Transport Agency for selling houses at what some consider unacceptably high prices “as compared to their CV”. Houses which they had purchased to facilitate the process in the construction of the new Western motorway connection in Auckland. My views on this specific matter were perfectly aligned to those expressed and articulated on the blog post by Open2View – enough said.
It does though demonstrate a continued practice by the media fixating on the sale price as compared to CV. Well I sense a coming ‘rude-awakening’ for a lot of people when instead of relying on the computer algorithm of QV to establish a benchmark of ratable value as a notional 'valuation' we instead may well turn to a more logical measure – the cost of rebuilding an existing house.
Now I know that just as a brand new Toyota Corolla costs around $35,000 whereas a 5 year old one costs around $12,000. A new house costs more than an older house due to the current cost of materials and labour being the determinant of the cost of a new house, whereas a ‘second-hand’ house costs what a willing buyer is prepared and a willing seller readily accepts.
But given the changes to the way the insurance industry views property insurance in the post-Christchurch earthquake world, we all will need to look at our property measured against the cost of replacement.
The industry has been undertaking an advertising campaign to highlight just this matter and gain an appreciation by homeowners as to the cost of replacement of a house. Because you cannot simply ignore this issue as it will effect every person that owns a house and has property insurance.
Whereas in the past your insurance cover could be purchased as a replacement cost with no defining financial number – now all such policies need to stipulate the cost of full replacement. That full replacement also has to cover the costs of demolition and clearing the site ready for rebuilding. Your insurance premiums will be assessed on that replacement cost and should the worst event occur of a fire or other disaster the insurance company will only pay out to the maximum of the defined cost of replacement, which if you have under estimated will leave you to foot the bill for the balance to get your house rebuilt.
Just to demonstrate just how this change will impact insurance and homeowners' appreciation of the value of their home, let me take you through an example of a property which I visited at an open home recently.
The home In the highly popular suburb of Grey Lynn has a Capital Value of $870,000 which is made up of a land value of $590,000 and improvements of $280,000. These improvements are defined as the building and all that exists on the bear land.
I went through the Home Rebuilding Cost Calculator to estimate the total cost of replacing this property. A highly detailed and lengthy exercise which does require a fair degree of appreciation of the details of your home’s construction.
The calculator came back with an estimate of $400,487 which includes GST and also an allowance for professional fees, demolition and removal of debris from the site.
Interesting that the CV for this property assessed the land at a value of $590,000 and the building at $280,000 yet the replacement cost of the building is estimated at $400,487. If the value of the land is appropriate (which is more likely to be the case) at $590,000 then the total 'value' of the land and building is very close to $1 million.
You are I am sure, interested to know the market value of the property today based on that well established notion of a "willing buyer and a willing seller". Well the property was sold recently for $1,395,000. This would therefore tells us that the value of land in this area is actually appreciated by 68% since the last assessment was undertaken in 2010/2011 – Auckland, or at least this area of Auckland is experiencing unprecedented demand.
I was prompted to write this article by the comment sent to me by a retired Quantity Surveyor who had read my article on why we should get rid of CV’s, he rightly asked the question as to whether people had considered what the long term effect will be on property / sales valuations once the insurance industry changes over to declared values for house insurance policies. He stated that as he had his own construction business engaging in construction of architecturally designed houses & spec housing. Many of the houses that he built had construction costs of more than double what the current CV values were & he rightly wondered once owners start realising that replacement costs far exceed the CV's for there property, that they will start to try & negotiate selling prices based on replacement costs.
He reflected that this might well apply more to expensive architecturally designed properties, but in his experience all building costs usually exceeds CV values due too as most property valuations are based on historical values & consequently out of date.
I am grateful for being prompted by this question and would gladly welcome any other such questions for future articles.