My parents have a house that may be 50+ years old on a block of land that has a land valuation (according to rates notice) around $120,000. Now, we are all told buildings depreciate. Therefore, theory says the house should be fully depreciated and the total value of house and land should be $120,000? Well, you try and buy it for that price. Good luck. Based on real estate prices in that area, it would sell for at least $300k. What’s the problem with my argument? Have I misinterpreted the theory?
Hi Wezwaz,
a block of land that has a land valuation (according to rates notice) around $120,000.
UCV’s are notoriously low, and have been ever since I can recall. The UCV (Unimproved Capital Value – i.e. supposed “land value”) is used to determine Rates, so this maybe keeps the number artificially low (???).
Don’t use a Rates Notice to determine land value – check it out with a RE agent. It seems you are largely aware of that.
Now, we are all told buildings depreciate. Therefore, theory says the house should be fully depreciated and the total value of house and land should be $120,000?
Hehe – tell me where you are selling, and me and my mates will buy every one of them !! :p
THEORETICALLY you are right – but REALITY is not like that, eh? The ATO allows us to write down the Capital Value of a house over 40 years at 2.5% pa – thus, at the 40 year mark, houses are (supposedly) worth $0. At this point, (also theoretically) the house should be knocked down and another one built. In many cases, this happens earlier than 40 years (e.g. development and subdvision) but if the house survives past that date, it still has an intrinsic value so long as it is inhabitable.
This “inhabitable” tag may well be related to how much is spent over its lifetime to KEEP it inhabitable – so, by spending Maintenance $$ on it, aren’t we pushing out the “use by date”? ;)
Anyway, in theory, your theory makes sense – in reality, reality is somewhat different ….. :p
Thanks for the question – I enjoyed having a crack at it. Let’s see if others can add their thoughts too,
Bennyas @benny notes – UCV is for ratings purposes, it is not based on a physical inspection of the property but is a statistically modified bulk valuation methodology which has been used. It does not reflect your reality, you can dispute it if you believe it is too low but do you want to pay land tax (if it isn’t a ppor)?
As far as I have read about buildings depreciation value, a yearly depreciation rate has been set to 0% if they have estimated useful lives of 50 years or more. I hope that helps.
Thanks for replies. I guess my post is a little bit cynical, but sometimes I can’t help it. I am more into shares than property, but having read and observed a lot about both investments, I do get a bit sick of generalizations people make, e.g. you can’t go wrong with property; it’s the land where the value is (may be the case if you’ve got a prime block in a city location with a derelict old house on it); the share market has never failed to reach a new high (check Japan’s market since 1989 and in Australia we’ve been waiting 8 years or so and we’re still a long way from the peak). So, I just threw this theoretical case out there to get some thoughts on it.
Hi Wezwaz,
Interesting comment there:
the share market has never failed to reach a new high (check Japan’s market since 1989 and in Australia we’ve been waiting 8 years or so and we’re still a long way from the peak).
I do not mean to argue with you, after all I am trying to get interested in equities and other financial products.
Can’t the same be said for Property markets? Ie. it never fails to reach new heights. I think, in the long term, both markets behave in tangent. The difference is Property market takes a lot longer to react (due to the documentation and due diligence required in buying and selling) and therefore the volatility is more subdued.
Do you know any website like this for equities / exchange traded products?
Many thanks,
CattsCattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
Catts
I think you missed my point about share markets rising to new highs. The point is the Japanese share market hasn’t remotely approached the high it set in 1989 – 27 years ago! Our market hasn’t remotely approached the high set in 2007 – 9 years ago. So when people make generalizations, you have to take them with a grain of salt. It’s often so far away from the truth.
As far as websites for equities, there are so many it just requires a Google search. I use CommSec quite a bit, for all things equity related – buying and selling, researching company financials and so on.
Wes.
Get a valuation done via a bank. Costs about $350 or if you know a Mortgage Broker they may arrange one free of charge.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
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