Comparing assessed and market values
A couple of weeks ago,
I was asked about the relationship of assessment figures to market prices.
It was, as some speakers are fond of putting it, "an interesting question."
In theory, of course, there should be at least a degree of parallelism.
In practice, though, the two can end up with a considerable gap between
them.
In any case, it seems useful to share my answer (not to mention expanding
upon it!), although, as I think you'll realize, it hinged on what was meant
by the word "relationship."
A starting point --
the MPAC idea
For some time, there was concern about inequities in the
taxes people were having to pay to their local municipalities, even though
they owned quite similar properties.
Naturally, differences in community mil rates was a factor, but this
was generally recognized and largely proved to be acceptable. However,
it didn't seem to make much sense that householders in a particular area
were being charged dissimilar amounts if their homes were much the same in
size and style. It often seemed that the basis of deciding what tax
should be charged had something to do with how old a house was and how recently
it had changed hands. In any case, it was far from certain that houses
that were alike -- and therefore getting an equal level of municipal services
-- were making equal contributions to the cost of providing them.
In consequence, public criticism of this situation -- which, to
give credit where it's due, was often voiced by municipal officials
themselves -- led to the creation of the Municipal Property Assessment
Corporation by the Ontario government in 1997.
It was charged with a twofold purpose:
a) to provide each Ontario municipality with a database of property values that were determined by a standardized method
b) to ensure that the assessed value of a property that would currently sell for $100,000 (or $200,000 or $300,000 or whatever price you choose) would match the figure that applied to any of its counterparts, regardless of their location.
A detailed
account of the role MPAC plays is, in fact, provided in its website, which includes a downloadable
.pdf file -- "Guide to Property Assessment in Ontario" -- that explains
how three different approaches to determining value (market
analysis, cost, and income) underpin the single use of "fair market
values" as the foundation for the assessment rolls that are issued to the
province's municipalities.
By now, most of us have become aware that the system is not only
in place, but also, despite a few complaints, doing a good enough job of
righting the wrongs of former days.
Not
quite the same thing -- or at least only partially so
It's splitting hairs, but there's an important difference between "fair
market value" and "the market analysis approach to value." MPAC does
use market comparisons in determining assessment values, but it also
recognizes that there are different ways of arriving at market
prices.
For example, a comparative market analysis is unquestionably the basis
for determining residential values. This, though, isn't
quite the same as saying that places sell for "fair market value."
Rather, it reflects the fact that home buyers shop prices. They aren't
likely to pay $125,000 for something they can find nearby for $100,000, nor
will they often think that the same sort of house can be bought for only
$75,000. Thus, the value of a house will fall pretty well in line
with what else is available for the same amount of money.
Beyond this approach, there are two other ways of deciding asking and
selling prices.
On the one hand, the income that can be earned from a property can
decide its value. For instance, apartment building prices reflect
the rents they can (or so it's to be hoped) put into an owner's pocket.
Similarly, prices can be put on retail and other rented premises by considering
the net income that their landlords are (or should be) able to derive from
them.
On the other hand, the cost of replicating a building can be used to
set its price. This is often the case when it comes to industrial
buildings, which vary considerably in both the products being manufactured
and their levels of profitability. Accordingly, it's usual to calculate
the cost involved in constructing them and, with an appropriate allowance
for accumulated depreciation, letting this be the value they represent.
Despite these variations in approach, however, the "fair market value"
that MPAC places on any given property does have its roots in
the marketplace. Thus, in this repect there is a direct
relationship with the figures that the market is currently asking.
A matter of timing
-- plus an additional factor or two
Although assessment figures and market prices can be seen as having
a similar basis and therefore run somewhat in parallel, there's also a time
lag between them.
MPAC has progressively reduced it until its assessments are now intended
to be only a year behind, but the volatility of the current market in many
communities can make them much more out of date. Worse still, market
forces can result in both sudden upsurges and all-but-overnight collapses
in market prices. Further still, the public, being as fickle as it
often is, can all at once switch allegiances to property types and locations
so that what applies today bears little resemblance to yesterday.
There are also additional factors that have a bearing on how much assessment
figures can be depended upon as a guide to market prices.
One is the sheer volume of properties MPAC is required to deal with.
There are more than four million assessments to be determined, which calls
for a great deal of statistical sampling -- and, as the pollsters like
to say, the results are accurate "19 times out of 20, with a 3% margin of
error." Thus, while overall accuracy may exist, individual
figures can be a long way from what they ought to be.
In addition, there's an admitted absence in MPAC's calculations of such
considerations as location (Desirable? Unpopular? Improving all the
time? Going steadily downhill?); condition (Move in?
Needs work? Lot of bells and whistles? Not an upgrade done in the
past twenty years?); supply and demand (Nothing else
like it? A glut on the market?); motivation (How
much does the seller need to sell? How soon must the buyer buy?);
and market history (How much has sold recently, if at all?
Is the market a "hot" one? Are buyers as scarce as hen's teeth?).
Recognizing all this, it's tempting to come up with a contrasting view
of the relationship between assessment and market figures. If there
are parallels in them, it's more a coincidence than anything else.
One other point deserves a mention.
Perhaps the "fair market value" concept overcame the mishmash of the past, but it also needed to deal with a couple of problems.
To begin with, while it was easy enough to smooth things out so that like would be assessed as like, enough homeowners were going to be faced with an increase that a public outcry was certainly foreseeable. There wasn't much said about it by anyone at the time, but there's little doubt that an answer lay in minimizing the repercussions by getting nonresidential taxpayers to pay a whole lot more than they were used to doing -- which, of course, is what happened. The rationale was that commercial properties ought to be valued by the income approach, whereas in the past they'd tended to be viewed more as larger-than-normal buildings. It also wasn't unfair to say that the market value of a business exceeded that of a house and the price put on it reflected the earnings it made possible. Not to mince words either, the commercial sector would be able to absorb the increases by pushing up their prices, with lots of people being none the wiser.
The other problem, of course, was the ongoing need to increase the tax base, which was compounded by the downloadings from both Ottawa and Queens Park. Without question, this wasn't part of MPAC's original audit, but it seems to have led to other attempts to apply the income approach. A notable example is its extension to Niagara-on-the-Lake B&Bs and -- so it's been reported -- to several horse farms in our Region. In any case, there's a sense among observers that additional attempts to increase assessed values can be expected, with similar departures from pure comparative market analyses being used to excuse them.
And when all this is given its due, yet another answer becomes possible: whatever the relationship between assessment and market figures happens to be, it most certainly isn't a static one.
All in all, I suppose I haven't come with a simple, straightforward answer, have I? Even so, the question is "an interesting one," isn't it?!!
Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake, Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812 Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail addressed changed as above on Nov 3 2007
website: http://www.duncanpollock.com