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Saturday, 25 August 2007

HOW SHOULD WE BE RATED?

The way rates are calculated, especially on Waiheke, is clearly iniquitous. The system could hardly be better designed to drive out long-term residents who happen to be middle- and low-income New Zealanders and cannot afford huge rates. People who bought properties many years ago for the proverbial axe and blanket now find themselves on properties with very high market values, which have then been over-inflated by the Auckland City Council's dodgy valuations. Living in their own homes thus becomes difficult or impossible. The piffling 25% rebate now patronisingly allowed to farms that were never intended to be subdivided, but were rated as if they were, does little to remedy the evil.

I think rates should be set in a radically different way (and I see nothing in the Rating & Valuation Act or the Local Government (Rating) Act that could prevent it). We should set them on improved values not capital values (also referred to as market values). That would be much fairer (especially if $3 million dollars were not being trucked off the island to prop up Auckland's empire and contribute to its roads), because the value of your improvements is usually closely related to your income.

If I were setting up a rating system I would divide the total needed to administer the island by the number of properties to get the average rates payment for each, then work out a threshold improved value and use a scale based on that to adjust the average up or down for each property.

For example, if the rates-take for the 6425 properties on Waiheke Island was to be the same under an improved-value system as it is under the present market-value system, i.e., $10.436 million, which is an average per property of $1624, the same average would be needed for the average improved value--but the spread would be very different, favouring low- and middle-income households. Quotable Value's figures show the improved average to be $180,131, so that would be the threshold. Therefore calculating your entire rates would be simple matter of dividing your improved value by 110.92. The rates for properties whose improved value was below $180,131 would thus be less than $1624 and those above it more. So someone in a modest, fifty-year-old cottage on Palm Beach would pay rates just on the value of the cottage, not on the millions the entire property would now in theory fetch on the market. If it was worth, say, $30,000, that average $1624 would drop to a comfortable $270. Conversely, someone in a house worth $10 million would pay $90,155.

If the rates-take needed for Waiheke was $12.85 million, the average rates would need to be $2000, making the divisor 85.66. In that case someone in a $30,000 cottage would pay $350 in rates, and someone in a $10-million-dollar house $116,731.

Compare the market-value and improved-value systems with three real examples, using properties in Palm Beach. The Auckland City Council's present hideously complicated system for residential properties on Waiheke is to multiply the 'market rental value' (5% of the so-called market value) by 0.039448, then add in the uniform annual-general charge and a long list of other bits and pieces. Quotable Value's figures show the average capital value for all types of residences on the island to be $635,127. The first example has a capital value very near that--$620,000, made up of a land value of $450,000 and an improved value of $170,000. It was rated a total of $1668 in 2007/2008. Under the improved-value scheme outlined above, it would have been rated $170,000 divided by 110.92, i.e., a total of $1532. The second example has a capital value of $460,000, but because it only has a shed on it its improved value is $10,000. Under the present system it is rated $1115. Under the improved-value system it would be rated $90. The third example is a cottage that was valued at $1.4 million by the Auckland City Council, but on appeal that was reduced to $920,000 (to be wrong by $480,000 is some error!). The land value is $800,000 and the improved value $120,000. At present it is rated $2333. Under the improved-value system it would be rated $1082 (although if the improved valuation were done properly that modest cottage would never be valued at $120.000).

Great Barrier's average improved value for its 1418 properties is $133,199. If that was used in the same way as for Waiheke, by using the same divisors, the average rates would be either $1200 or $1554, which would bring in a total of $1.702 million or $2.204 million.

The rates for unimproved land would obviously have to be calculated differently. Square area would be a prime factor, perhaps using a formula that involved an adjustment on market value followed by one to make the result fair when set beside the rates for improved land. The threshold to use could be reckoned on the reckoned market value per square metre, thus creating a multiplier of value based on area.

One way of arriving at the rates for unimproved residential properties would be to work out their average size, call that the threshold and thus the size that attracted the average rate ($1624 or $2000 in the above examples). That would give an average per square metre, which would give the base figure. Location/market values in adjacent improved properties could then be used to adjust that.

So if, for example, 1000 square metres was found to be the average size of residential properties on the island, and there were two adjacent properties, one of 1000 square metres with an improved value of $180,131 and the other an unimproved one of 800 square metres, and the registered value of the improved one was $360,232 and of the unimproved one $120,000. The improved one, for a rate-take of $12.85 million, would have to be rated at $2000 because it had the average improved value. So with its improvement it would have been rated at $2 per square metre. Taking that rate over the boundary to the unimproved property would give a base figure also of $2 a square metre and thus a total of $1600, but that would then be multiplied by 120/360 to give $533. Something along those lines would give a fair balance of public costs.

Farms could also be rated on improved value, which might include the value of livestock averaged over a year, with perhaps an adjustment downwards to take into account the employment generated and the value of that to the island. But whatever formula was used for rural land would have to be seen to be fair when set beside residential rates.

This system would eliminate what is driving low- and middle-income families and individuals off the island. A beneficial side-effect would be to discourage huge, expensive palaces, thus preventing the island's character from sliding into the tasteless yuppie abyss.

That effect can and should be strengthened by adding a graduated scale to the improved-value system, making, say, the divisor go down 4% of the original 110.92 as the improved value multiplies. That would proportionally increase the rates for the upmarket properties, which would also be fairer. Thus, for example, rates for a property with an improved value of $2.7 million, which is fifteen times the base average of $180,131, would have the divisor reduced by 15*4%, thus reducing the basic 110.92 by 15 lots of 4.4367 to 44.368. That would raise the rates on that property to $60,855 rather than the unfairly low $23,440 it would have if it were rated on the same basis as that shed in Palm Beach. That process would obviously have to have a limit, so the divisor might be set to bottom out at, say, 20, a value that would make the rates on a $10,000,000 house $500,000.

Adding that graduated scale into the mix would obviously further reduce the rates imposed on low- and middle-income groups, because the rates-take needed would be more easily satisfied. So that would turn the calculation into a two-stage process. The first would be as above (dividing your improved value by the appropriate divisor) followed by an across-the-board adjustment to reduce the rates-take to the total required. If, for example, in the first stage the total added up to $15 million and only $10 million was required, all individual rates would then be multiplied by 10/15.

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Silly question: Why is the assumption always made, and always believed to be true, that rates have to go up? What are they, hot-air balloons? Manufacturers fight to get their costs down. Councils should too.