The relevance of CVs (Capital Values) has been questioned recently. It’s not the first time and I’m sure it won’t be the last, but the one thing I think we have to come back to is that CVs are a great anchor point for market value and, either consciously or sub-consciously, pretty much everyone in the market uses a CV as a guide.
In fact, there are a number of automated valuation models (AVMs) in the market and these models look at the characteristics of recently sold properties to calculate a current market value for all properties. One of the key input characteristics for these models? The CV.
The important thing to remember is that no one expects a property to sell for its CV, because that value is relevant only at the time of calculation. But, what is relevant is what similar properties are currently selling for in relation to their CVs.
We naturally do it when looking at houses selling in our neighbourhood. Statements like “Did you see the house at No.23 sold for $800k? Ours must be worth at least $850k then!” are common, and it’s a perfect example of how we automatically use comparable properties to assess the value of our own. Models just formalise this. And without CVs they’d be much less accurate.
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To add some stats to it, right now in Auckland, higher value properties (especially those with a CV above $1.2 million) typically sell at, or slightly below, their CV. Properties at the lower end? They’re selling slightly above.
And while I’m nerding out on data and statistics, let’s also touch on the issue of median sales prices being used as a method of assessing market performance. They shouldn’t be. That’s not to say they’re not useful to understand the typical entry point for a suburb, but using it to measure change over time is not advisable.
A recent analysis using median sales prices suggested that properties in Herne Bay had gained in value by $940,000 in a year. This was because the median sales price went from $1.56m a year ago to $2.50m recently. Great headline, but what the analysis didn’t mention was that there are typically fewer than 70 sales per year in Herne Bay. So a median sales price would only represent about 6 per cent of all properties in the suburb (which has more than 1200 properties in total by the way), and the types/sizes/value of those properties selling can dramatically change year on year.
For instance, if most of the sales a year ago were for cheaper properties (in a Herne Bay context around $1m ), yet this year there have been a lot more at the top end — let’s say above $3m (potentially influenced by something like the approaching foreign buyer ban combined with the America’s Cup announcement), then that will directly influence the median sales price.
A far more reliable measure of market performance is to use AVMs to calculate the market value of every property in the suburb at the two points in time and then compare the difference. In Herne Bay this would give us a median property value increase of $101,450 (from $2.61m to $2.71m) in the past year.
Nick Goodall is head of research of CoreLogic NZ.
