What does market value really mean?

New Zealand’s housing market has been running hot over the last 12 to 18 months, causing buyers and sellers alike to question the true value of their home. Craig Russell demystifies a common term to better understand our housing market.

February 23, 2022

By Craig Russell


New Zealand’s housing market has been running hot over the last 12 to 18 months, causing buyers and sellers alike to question the true value of their home.

An accurate market value is essential for buyers who require approval from the bank, estates and trusts that need to make important decisions, or sellers who need advice for planning their next move.

It supports both buyers and sellers to be confident that they’re agreeing to a fair price that’s in line with the market in the surrounding area and specific characteristics of the property in question.

With headlines boasting about homes selling for 10-20% over market value, the concept of market value has become muddled, and a common – albeit incorrect – assumption is that market value equals whatever price has been achieved at auction. But what a property sells for isn’t necessarily what it’s worth.

To help demystify some of the assumptions about what market value is and isn’t, Residential Property Advisor Craig Russell provides insights on the issue.

What you think you know about market value is probably wrong

It’s tempting to think that a property is worth whatever it sells for, but market value is not determined by a single sale or a single property.

When figuring out market value, you have to ask: if that property were to sell again next week, would it still achieve the same results? Would those same high bidders return? Would it play out in the same way?

A lot of properties in New Zealand are currently selling at auction, but there’s a lot of emotion and adrenalin at an auction. Even buyers who go in with certain levels of expectation get caught up in the moment and can bid higher than planned.

New Zealand’s housing market has been incredibly dynamic over the past twelve months, meaning that prices and perceived values have changed rapidly over short periods of time.

Market value is not, “what is the highest price I can get for my property?”, it’s an estimate of how much a property is likely to sell for at a point in time, based on the recent sales of similar homes in the locality over a short period.

How market value is really determined

The definition of market value that we work by is:

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion.

The key words are: estimated amount, willing buyer and a willing seller, prudently, and without compulsion.

Let’s break these down.

Market value will always be an estimate within a given range. It is not an exact science like you’d see with accounting, where the debit and credits on the balance must equal or there’s an error. It’s an informed estimate completed by an independent Registered Valuer, based on their professional opinion of the market conditions.

This includes looking at five to seven transactions from the area within a short period of time, and understanding the story behind each sale to determine a fair and probable price that the home could sell for on any given day.

This is different to an appraisal that might be done by a real estate agent, or a computer generated valuation done online. The online valuations take into account rating values and recent sales in the area to give an expected range, but do not look at the individual characteristics of a property or the nuances of the recent sales data.

When assessing recent comparable sales, the valuer will look for the circumstances of each sale to determine whether either party might have been acting under compulsion.

What this means is that they aren’t acting under urgency, for example, selling due to divorce, death, or debt, or buying on a deadline because they’ve sold their own home and must vacate. This kind of urgency can drive prices higher than expected and inflate a property’s perceived value.

In the last twelve months, we’ve seen a lot of buyers acting with compulsion, buying homes they haven’t even inspected, and acting imprudently with speed and emotion. This can make it difficult for an average buyer or seller to estimate their market value, without the support of a professional valuer.

Why rating value has little to do with it

Rating valuations (‘RVs’) are mass appraisals completed by local councils every three years, and have little bearing on market value in the current environment.

Firstly, because they’re only updated every three years, the valuation can quickly date and become irrelevant to buyers and sellers wondering how to price their property. Secondly, because they’re mass appraised, they’re based on records within a suburb and have little reflection on the individual value or features of a property.

Typically, buyers would set a price limit based on the RV, like, ‘I don’t want to pay more than 10% over RV’, but it can be hard to make those calls in a hot market where things move so quickly. These days, RV may not even enter into a buyer’s decision.

How to get your market valuation

The best way to find out the market value of your home is to get in touch with a registered valuer.

Our team of experienced professionals follow international standards to calculate the value of your property based on a thorough inspection comparing size, features, interior and exterior, with a close analysis of recent sales in the surrounding area.

We have valuers based in all major centres around New Zealand, specialising in different sub-sectors of the property market. Whatever it is you’re buying or selling, you can come to our team for answers.

Get in touch with a residential valuer today

This article was originally published by TelferYoung