CPP41419 Property Valuation and Appraisal 2 — Questions and Answers
Question 1: What does the 'land to asset ratio' indicate in residential property valuation?
- The proportion of mortgage debt to total property value
- The proportion of the land value to the total property value (Correct answer)
- The ratio of rental income to land tax payable
- The percentage of council rates applicable to the land component
Correct answer: The proportion of the land value to the total property value
The land to asset ratio measures the proportion of a property's total value attributable to the land itself, which is significant because land typically appreciates while buildings depreciate.
Question 2: Which method of property appraisal is most appropriate for valuing an investment property where rental income is the primary consideration?
- Comparative sales method
- Income capitalisation method (Correct answer)
- Cost approach method
- Residual land value method
Correct answer: Income capitalisation method
The income capitalisation method determines value based on the income the property generates, making it most appropriate for investment or income-producing properties.
Question 3: What is 'gross rental yield' used to measure in property appraisal?
- The total maintenance costs as a proportion of rent received
- The annual rental income as a percentage of the property's purchase price (Correct answer)
- The proportion of rent allocated to mortgage repayments
- The net profit after all property expenses are deducted
Correct answer: The annual rental income as a percentage of the property's purchase price
Gross rental yield is calculated by dividing the annual rental income by the property's purchase price and expressing it as a percentage, giving a quick measure of return.
Question 4: How does depreciation affect the value of a residential property's building component over time?
- It increases value due to renovation investment
- It reduces the value of the built structure as it ages and wears (Correct answer)
- It has no impact if the property is owner-occupied
- It only applies to commercial properties, not residential
Correct answer: It reduces the value of the built structure as it ages and wears
Depreciation reduces the value of a building structure over time due to wear, age, and obsolescence, which is why the land component is often the primary driver of long-term value growth.
Question 5: What is meant by the 'highest and best use' principle in property valuation?
- The use that generates the highest rental income regardless of zoning
- The most profitable legally permissible use of a property that is physically possible and financially feasible (Correct answer)
- The use preferred by the current property owner
- The use that results in the lowest council rates
Correct answer: The most profitable legally permissible use of a property that is physically possible and financially feasible
'Highest and best use' is the most profitable use of a property that is legally permitted, physically possible, and financially viable, and is a foundational concept in property valuation.
Question 6: Which of the following is an EXTERNAL factor that can affect residential property values in Australia?
- The vendor's motivation to sell quickly
- Interest rate changes set by the Reserve Bank of Australia (Correct answer)
- The colour scheme chosen by the vendor
- The agent's commission rate
Correct answer: Interest rate changes set by the Reserve Bank of Australia
Interest rate changes by the Reserve Bank of Australia directly affect borrowing costs and buyer purchasing power, making them a major external driver of property values.
Question 7: What does it mean when a property has 'passed in' at auction in the context of property valuation?
- The property sold to the highest bidder
- The highest bid did not meet the vendor's reserve price and the property was not sold under the hammer (Correct answer)
- The property was withdrawn from sale before auction day
- The auctioneer extended the bidding time by passing the bid to another buyer
Correct answer: The highest bid did not meet the vendor's reserve price and the property was not sold under the hammer
'Passed in' means the highest bid at auction did not reach the vendor's reserve price, so the property was not sold, and the price achieved gives a useful market indicator for appraisal purposes.
CPP41419 Property Valuation and Appraisal 2
What does the 'land to asset ratio' indicate in residential property valuation?