Whenever you’re investing in real estate or starting to investigate property, you’ll run into the terminology “capital value.” In Australia, it’s a significant part of understanding a property’s value.
But what is capital value, and why is it significant for homeowners, investors, and buyers? In this article, we simplify capital value, disclose why it’s significant in the property marketplace in Australia, and make an example of it in contrast with other forms of valuations.
By the end, you’ll have a quick grasp of capital value and how it could make a difference in your property-related choices.
What is Capital Value?
For many, capital value simply describes the amount a property will most likely sell for in a normal state of affairs in an open marketplace. In simple terms, it’s the amount a buyer will pay, assuming no extraordinary events such as forced sales or artificial pricing.
It’s a picture of a property’s real marketplace value. Varying definitions apply in different states and territories in Australia, but they all revolve around a similar principle: it’s the value of an overall property, including a property’s improvements and lands.
People sometimes confuse capital value with site value, which is the value of the land alone without improvements. Capital value takes a broader view of a property. It considers both structures and property lands, offering a fuller value for a property’s overall marketplace position.
When you see local councils and government agencies discussing capital value, they usually aim to establish a baseline for how much your property could be sold for if you listed it on the market in a typical scenario.
How Do Real Estate Agents and Appraisers Value a Property?
Qualified valuers, or local authorities, will calculate a property’s capital value by looking at:
- Recent Sales of Comparable Properties
- The Characteristics of the Land
- Local Zoning Regulations
- The Age and Condition of Any Building
- Broader Market Trends
A property in an inner, highly desirable Melbourne suburb, for instance, will have a larger capital value than an equivalent property in a rural district simply because it is in a highly desirable location.
Valuers will then evaluate your property’s individual factors, such as bedrooms, bathrooms, configuration, and overall state. They compare these to similar nearby property sales over several months.
If comparable homes in your suburb have been selling at a premium, that trend can push up your capital value. On the other hand, a sluggish local economy or an oversupply of properties might put downward pressure on these values
Capital Value Versus Market Value
You might wonder if capital value and market value are the same. They’re closely related, but not always identical. In theory, capital value aims to reflect market value. However, you’ll sometimes notice a discrepancy between a council’s capital value figure and an actual selling price.
Market value can fluctuate quickly with shifts in demand, interest rates, or economic conditions, while capital value is often assessed periodically by councils or rating authorities.
For example, let’s say you decide to sell your property. If your local council assessed your home’s capital value at $600,000 a year ago, market forces might push the real selling price to $650,000 if there’s a surge in buyer interest.
Conversely, if interest rates climb and buyers tighten their budgets, your market value might drop below the council’s assessed amount. Despite these differences, capital value still serves as a valuable benchmark.
How Capital Value Applies in Australia
Rates, council, and, in some sections of Australia, land tax can use capital value or a variation (e.g., capital improved value) to calculate charges. In South Australia, for instance, council rates will sometimes rely on capital value in calculating your council rate payment. In a high-value property precinct, your property could pay a high council rate.
What’s more, many Australians use capital value as a guideline when buying and selling property. Even though not exclusively, it can serve to inform expectations.
Sellers can use a property’s capital value to support its price tag. Buyers can use current sales information and capital value in deciding whether a property is overvalued, a bargain, or somewhere in between.
How Often Is Capital Value Assessed?
Depending on your local council, your property might be reassessed every year, every few years, or whenever there’s a significant change – such as a major renovation. Councils can send out notices showing the updated capital value, which can affect your rates. If you disagree with the figure, you may file an objection.
Evidence like recent sales data or valuation reports from independent appraisers can support your case, though councils usually stick to their own methodology.
In fast-moving markets, you might see a big difference between the council-assessed value and actual sale prices. Buyers and sellers often rely on private valuations or real estate agents’ appraisals to get a more current figure.
Utilising Capital Value when Buying and Selling
Although market factors shift faster than councils can update records, capital value is still a helpful reference point when buying or selling. It can:
- Serve a Pricing Guideline: As a seller, use it to demonstrate your property’s recognised value, especially if your local council recently increased your figure.
- Spot Upside Opportunity: If your property’s capital value is lower than similar ones in your region, investigate whether renovations and smart improvements could energise it (and, in turn, your future resale price).
- Guide Your Budget: As a buyer, you can check a property’s capital value to gauge whether the asking price aligns with official assessments or if the seller has priced it too high. This also helps you anticipate future rate bills and other charges.
Tips for Homeowners and Investors
- Stay Informed: Keep track of your council’s notices on capital value. If you see an unexpected jump, understand whay. It may reflect market growth, or it might be a simple data update.
- Challenge Inaccuracies: If you believe your property’s capital value is incorrect, you can file a formal objection. Provide evidence through comparable sales, photos, or independent valuations.
- Think Long Term: Rising capital value can signal a healthy property market and boost your equity. However, it also increases your rates. Budget for these costs and factor them into your investment or ownership plan.
- Broader Research: Don’t limit yourself to capital value figures. Gather as much information as possible – local market trends, neighbourhood features, median house prices, and upcoming developments in the area – to build a complete picture.
Final Thoughts
Capital value represents a property’s assessed market worth, taking into account land value and improvements. It’s a crucial benchmark that councils, lenders, and property owners use for different reasons, including calculating rates, guiding mortgage assessments, and setting price expectations in the market. While it doesn’t always match the sale price on the day, it offers a useful snapshot of your property’s standing in the broader real estate landscape.
If you’re looking to secure a mortgage overseas or here in Australia, make sure that you utilise Upscore’s free FinancePassport service to streamline the process and simplify the property buying experience.
