Unintended consequences: the use of property tax valuations as guide prices in Wellington, New Zealand

Abstract

Property markets are characterised by a lack of information, particularly in relation to price. Where guide prices are not provided for properties and sale prices for comparable properties are not widely available, buyers and sellers may depend upon valuations of the property that are not intended to act as market valuations. The resulting anchoring heuristics may lead to a reliance on that information in decision-making. Using mass valuation data and house sale transactions for Wellington, New Zealand, between 2007 and 2010, issues relating to transaction volume, transaction prices and the release of government valuation data are evaluated through a two-stage hedonic estimation. The timing of transactions was related to the release of government valuation data as well as significant relationships found between the government value of the land and final transaction price. These findings suggest that transaction price influences are an unintended consequence of making mass valuation information the only freely available information to the public.

Keywords:

• Taxation
• capital valuation
• government valuation
• residential property
• transaction price

Notes

1. Filippova & Rehm (2009) use dummy variables to represent these census units. The present study uses the numerical indicators of locational units instead of dummy variables thus capturing the influence of the geographical location of census units on land value and house price. This method avoids the unnecessary loss of degrees of freedom when an extensive number of locational dummy variables are added. It also avoids the problem of multi-collinearity between the locational dummy variables and house characteristic variables, particularly when houses have similar characteristics in specific vicinities.