Psarreas and Secretary, Department of Families, Community Services and Indigenous Affairs and Anor

[2006] AATA 670

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 670

ADMINISTRATIVE APPEALS TRIBUNAL          № V2006/191
  N° V2006/192

GENERAL ADMINISTRATIVE DIVISION

Re:           phillip psarreas and

SOFIA PSARREAS

Applicants

And:secretary,

department of families, community services and indigenous affairs

And:         SECRETARY,

DEPARTMENT OF EMPLOYMENT AND WORKPLACE RELATIONS

Respondents

DECISION

Tribunal:       Mr Egon Fice, Member

Date:31 July 2006

Place:Melbourne

Decision:The decision of the SSAT made on 15 February 2006 should be set aside and the matter remitted to the Secretary for reconsideration on the basis that the Nicholson Street property is valued at $690,000.

(sgd) Egon Fice

Member

SOCIAL SECURITY – Aged Pension – Disability Support Pension – reduced rate – increase in combined assets – valuation of real property

Re Greenham v Minister for Capital Territory (1979) 2 ALD 137

Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60

Re Woodhouse and Secretary, Department of Social Security (1987) 12 ALD 474

R v Brown (1867) 2 LRQB 630,

Spencer v Commonwealth of Australia (1907) 5 CLR 418

REASONS FOR DECISION

31 July 2006  Mr Egon Fice, Member

1.      On 4 October 2005 a Centrelink delegate acting as agent for the Secretary, Department of Families, Community Services and Indigenous Affairs (the Secretary), reduced the rate of Mr and Mrs Psarreas’ age pension and disability support pension after revaluation of an investment property, which they jointly own with their children, at 182 Nicholson Street Fitzroy (the Nicholson Street property).

2.      Mr M. Trevethick, a certified practising valuer employed by the Australian Valuation Office (AVO), conducted a kerb-side valuation of the Nicholson Street property and assessed its value at $820,000.  Mr and Mrs Psarreas disagreed with the AVO valuation and requested an internal inspection of the property.  After conducting an internal inspection, the AVO maintained that the property was valued at $820,000.  Mr and Mrs Psarreas requested a review but an authorised review officer (ARO) agreed with the AVO valuation.  Mr and Mrs Psarreas then sought review by the Social Security Appeals Tribunal (SSAT).  On 15 February 2006 the SSAT affirmed the decision of the ARO.  Mr and Mrs Psarreas now seek a review of the SSAT decision.

3.      The only matter in dispute between the parties is the correct valuation of the Nicholson Street property.

RELEVANT FACTS

4.      Mr and Mrs Psarreas received letters from Centrelink dated 29 July 2005 informing them that Centrelink was currently reviewing the value of their real estate assets.  The letters stated that the market value of their real estate (apart from the home in which they lived), being the Nicholson Street property, would be counted as an asset in assessing their pensions under the means test.  On 15 September 2005 Centrelink revalued the Nicholson Street property at $616,000 (previously $450,000) and notified Mr and Mrs Psarreas that their aged pension had changed as a result of that valuation.

5.      Following a complaint about the valuation from Mr Psarreas, Centrelink arranged for a kerb-side valuation to be obtained from the AVO.  A kerb-side valuation was completed on 4 October 2005 and Centrelink was informed that the Nicholson Street property had been reassessed at $820,000.  Mr and Mrs Psarreas were notified of that valuation by a letter of the same date. 

6.      Mr and Mrs Psarreas consented to a full valuation being conducted of the Nicholson Street property by an AVO valuer.  The valuer, Mr Trevethick, completed that valuation inspection on 4 October 2005.  Centrelink provided Mr and Mrs Psarreas with a letter dated 7 November 2005 confirming that an internal inspection of the Nicholson Street property had resulted in the property being valued at $820,000.  Mr and Mrs Psarreas sought a review of that decision by an ARO on 14 November 2005. 

7.      The AVO provided Centrelink with its written valuation report on 26 November 2005.  That report confirmed the AVO’s initial kerb-side valuation of $820,000. 

8.      Between September and December 2005 Mr and Mrs Psarreas obtained three valuations of the Nicholson Street Property from licensed real estate agents.  In a one page letter, Mr Peter Markovic, Licensed Real Estate Agent, valued the Nicholson Street Property at $500,000 as at September 2005.  Mr Scott McElroy, a director of Hocking Stuart, Estate Agents, provided a single page valuation indicating that if placed on the market for sale, his firm would expect buyers to be willing to pay $500,000 to $520,000.  The third valuation was provided by Mr Blake Howard, of K+P Smyth Pty Ltd, Licensed Real Estate Agents.  After inspecting the Nicholson Street Property, Mr Howard valued the property at between $500,000 and $550,000 in its current state.  He noted that if the property were renovated, it may attract $650,000 to $700,000.

9.      Mr and Mrs Psarreas obtained a more detailed valuation from Victorian Independent Property Consulting (VIP Consulting) in December 2005.  Mr John Melatti, a director of VIP Consulting, valued the property at between $540,000 and $590,000, as at 21 December 2005.  He provided a detailed report and took into account the condition of the house, its size, current market conditions and comparable valuation data.  A rates instalment notice for 1 July 2005 to 30 June 2006, obtained from the City of Yarra, discloses the capital improved value of the property as $620,000.

10.     Mr and Mrs Psarreas obtained one further valuation, from Mr D. Dunn, a director of City Fringe Properties Pty Ltd (CFP), on 26 April 2006.  After inspecting the Nicholson Street property, and taking into account a direct comparison of sales in the area, CFP considered that the Nicholson Street property would sell for between $675,000 and $710,000, the most probable price being $690,000.

11.     All of the valuations obtained by Mr and Mrs Psarreas have been rejected by the Secretary.

VALUATION AT THE RELEVANT DATE

12.     The relevant date of valuation of the Nicholson Street property, for the assessment of Mr and Mrs Psarreas’ pensions, is 4 October 2005.  Valuations obtained by Mr and Mrs Psarreas from Peter Markovic, Hocking Stuart and K+P Smyth were all obtained in September 2005.  Although the Secretary objects to those valuations because they were provided by real estate agents and not by certified or registered valuers, they are valuations which were obtained on or about the relevant date.  The valuation obtained from VIP Consulting is said to be an open market valuation of the Nicholson Street Property as at 21 December 2005.  Nevertheless, the comparable sales data upon which that report was based comprises sales made between August 2005 and December 2005.  No objection seems to have been taken regarding the valuation date of the report prepared by VIP Consulting.  In any event, at the hearing of this matter, Mr and Mrs Psarreas relied on the valuation provided by CFP regardless of the other valuations which were in evidence before the ARO and the SSAT.

13.     Although not argued before me at the hearing, a question which arises is whether the Tribunal can accept the valuation evidence provided by CFP in circumstances where that valuation was not before either the original decision maker or the SSAT on review.

14.     It is well established that the Tribunal is not bound by facts that were before the decision maker (see Re Greenham v Minister for Capital Territory (1979) 2 ALD 137). In fact, the Tribunal must take into account all relevant facts of which it is aware, even though they might not have been known to the original decision-maker. The Full Court of the Federal Court said in Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, at 68:

The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him.  The question for determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal.

On the authority of Drake, the valuation provided by CFP is clearly relevant and must be considered by the Tribunal.

15.     Nevertheless, the Secretary argued that there was some question about the utility of the CFP valuation given that it was provided some six months after the relevant date.  The Secretary submitted that a comparison of valuations provided six months apart may result in substantially different outcomes.  Were there no further evidence of the validity of a valuation conducted in April 2006, that submission might carry substantial weight.  However, Mr Dunn’s evidence was that the current cycle of property values in Melbourne reached its peak between November 2003 and the beginning of 2004.  After that time, according to Mr Dunn, property values receded by five to ten per cent and since that time they have plateaued, except in the case of properties in great demand, such as those in the Toorak area.  Mr Dunn said that properties valued in excess of $2,000,000 remained in demand but that the price paid for run of the mill properties was flat and had remained so since early 2004.  His evidence was that there was not a marked difference between a valuation conducted in October 2005 and April 2006.  The evidence of Mr Dunn on this point was not contradicted and I accept his evidence.  I am satisfied that the valuation provided by CFP is relevant for the purposes of assessing the value of the Nicholson Street property as at 4 October 2005.

VALUATION METHODOLOGY

16.     The main issue between the parties was whether the Tribunal should accept the valuation methodology adopted by the AVO or CFP.  Both Mr Trevethick and Mr Dunn are registered valuers.  At the hearing, Mr and Mrs Psarreas relied solely on the report prepared by CFP.  Therefore, the only question for the Tribunal to answer is whether it should accept the methodology adopted by Mr Trevethick or the methodology adopted by Mr Dunn.

17.     Mr Trevethick said that he had been employed by the AVO for some sixteen years.  In the past four years he had been involved almost exclusively in the valuation of properties in the City of Yarra, where the Nicholson Street property is located.  On the other hand, Mr Dunn has been a registered valuer since 1976.  Since that time he has been involved in all aspects of valuation, particularly of properties located on the fringe of the city.  Mr Dunn is also a qualified real estate agent and, for a period of time, he was a part owner of a company called Nelson Alexander, which had offices in both Fitzroy and Carlton.  In that capacity, he was involved in the sale and leasing of properties of a similar nature to that of the Nicholson Street property, in the Fitzroy and Carlton areas and nearby suburbs.

18.     The Tribunal’s approach to the valuation of properties in applications such as these was clearly stated in Re Woodhouse and  Secretary, Department of Social Security (1987) 12 ALD 474. After examining the decisions in Spencer v Commonwealth of Australia (1907) 5 CLR 418 and R v Brown (1867) 2 LRQB 630, the Tribunal said, at 477:

In particular, both cases are authority for the propositions that in assessing market value one must both ascertain the highest and best use of the property and assess the price that a desirous buyer would pay to a willing but not anxious seller to purchase the property.

19.     Mr Dunn and Mr Trevethick valued the property on the basis that its highest and best use was as a dwelling.  However, that description can be applied in two ways, particularly because of the way that the property is currently structured.  The Nicholson Street property, which is a two-storey Victorian terrace dwelling, is partially used as a boarding house.  The ground floor, which has five bedrooms and a communal kitchen, is let to persons seeking boarding accommodation.  A bathroom and laundry have been constructed external to the main building, with a separate toilet.  The first floor of the dwelling is occupied by Mr and Mrs Psarreas’ son and his family.  It comprises three bedrooms, a dining room, living room, and bathroom and toilet suite.  Access to the first floor area is by an internal stairway through the boarding room area on the ground floor.

20.     Because of the nature of the current use of the Nicholson Street Property, an issue arose regarding the difficulties of attracting a buyer.  In fact, Mr Dunn provided a secondary valuation based on what he described as the capitalisation approach.  This valuation method takes into account the estimated annual gross income from the property, assuming that the first floor of the dwelling would also be let.  According to Mr Dunn, the reason for adopting this approach was that it would be almost impossible, given the property’s current configuration, to get a family to move into the first floor, because the only access to the first floor was via the staircase through the boarding room area.  Because of the nature of the ground floor accommodation, and the rentals which the bedrooms attracted, being between $60 and $70 per week, Mr Dunn suggested that the type of persons who would be attracted to that form of accommodation would generally be male and down and out types.  This view was confirmed, according to Mr Dunn, by the nature of the laundry, bathroom and toilet facilities provided for the ground floor tenants.  Therefore, according to Mr Dunn, if the purchaser intended to use the dwelling as a family home, substantial renovations would need to be conducted internally. 

21.     Mr Trevethick disagreed that the capitalisation approach was a suitable method of valuing this property, because he considered that its highest and best use was as a house.  He did agree that some renovation work would need to be done in order to attract a buyer who wished to utilise the premises as a family home.  Mr Trevethick was of the opinion that although no major structural work was required, the additional amenities area at ground level would need to be demolished and that the ground floor would need to be significantly reconfigured.  However, he disagreed with Mr Dunn about the cost of carrying out renovations to make the dwelling suitable for use as a family home.  In his opinion, the cost would be less than $100,000.  By way of contrast, Mr Dunn estimated that it would cost between $250,000 and $300,000 to bring the home up to a standard which would be attractive for use as a family home.  However, given that neither valuer is an expert in costing renovations, I am not satisfied they were in a position to accurately estimate the cost of suitable renovations.  Mr Con Psarreas, Mr and Mrs Psarreas’ son, who works in the construction industry, gave evidence that suitable renovations would cost at least $250,000.  However, I am not satisfied that he is in a position to accurately estimate the cost of suitable renovations either.  Although the estimated cost of renovating the dwelling influenced both valuers when arriving at a valuation based on comparative sales, it had no effect on Mr Dunn’s valuation based on a capitalisation approach.

22.     Despite Mr Trevethick’s rejection of the capitalisation approach adopted by Mr Dunn, in my view, there is some merit in using this approach, even though it was, according to Mr Dunn, merely secondary and provided in support of his principal valuation based on comparative sales.  I have come to this view because the current configuration of the Nicholson Street property does, without renovation, lend itself to use as a rental property, even though the first floor area access is perhaps not the most desirable.  Using this approach, Mr Dunn has valued the ground floor rooms at $60 per room per week, assuming 100 per cent occupancy.  This is so even though Mr Con Psarreas‘ evidence was that the occupancy rate of the ground floor bedrooms was usually about 50 per cent.  Mr Dunn estimated the rental rate for the first floor at $300 per week.  In his view, the appropriate capitalisation rate was between 4 and 5 per cent and, using a 4.5 per cent capitalisation rate, he calculated the value at $693.333.  Given that Mr Dunn said that he had some leasing and property management experience, I accept that he has a fair understanding of the rental values which the Nicholson Street property might attract.  I also accept that relatively small variations in the rental figures which this property might attract would result in a substantially different capitalised value as would a small change in the capitalisation rate.  Nevertheless, it is, in my opinion, a reasonable analysis if only to provide, as Mr Dunn said, a ball park check on other methods of calculating values.

23.     Mr Trevethick adopted two valuation methods based on representative sales or sales of comparative properties in the area.  Mr Dunn also conducted a comparative analysis of sales in the area using different properties with, not surprisingly, a different result.  One of the difficulties in using a comparative or representative sales value, which was admitted by both valuers, is the fact that valuers do not have internal access to the comparative properties.  Therefore, they were both entirely dependent upon descriptions of the condition of the comparative properties obtained from the agents who had sold those properties.  Although that clearly is a shortcoming of this method, it is one which applies to all properties used as comparisons.

24.     Each party was also critical of the properties selected by the opposing valuer to conduct the comparative analysis.  Quite clearly, the selection of comparative properties can have a significant effect on the value attributed to the subject property.  The subject property, which has eleven main rooms and is situated on land of approximately 302 square metres, is substantially larger than any of the comparative properties used by either valuer.  Some of the comparative properties were closer to the city centre and some were further away than the Nicholson Street property.  Also, based on the internal condition reports of those properties received from the agents who had sold them, the condition of the comparative dwellings could generally be described as superior to that of the Nicholson Street property, although there was some dispute about its internal condition.  I do not consider that dispute to be sufficiently significant to alter my ultimate views about the value of the Nicholson Street property.

25.     The comparative properties selected by Mr Dunn were properties which had main road frontage.  Mr Dunn said he selected those properties because of the noise levels suffered by main road properties, particularly during the two traffic peak hours in any day.  Two of the properties were in Nicholson Street, Fitzroy and the third in Nicholson Street, North Carlton.  Although the dwellings themselves are substantially different from the Nicholson Street property and they were recently sold for between $1,060,000 and $510,000, Mr Dunn said he took into account the condition of the buildings described to him, the fact that they are of a similar age to the Nicholson Street property and the fact that one of those buildings was opposite the Exhibition Gardens, which he regarded as a superior location. 

26.     On the other hand, Mr Trevethick had selected two-storey buildings which, although similar in style to the Nicholson Street property, were not necessarily on main thoroughfares and sometimes had a commercial use at ground level.  They all had fewer rooms than the Nicholson Street property and were located on smaller areas of land.  Their sale prices varied between $910,000 and $650,000.  He admitted that some of the comparable properties provided better comparison of value than others. 

27.     While the properties selected for comparison by both valuers differed substantially, I do not believe that the selection itself detracted from a comparative analysis in either case.  In my view, it is the method used by the valuer to arrive at a value for the subject property, using the comparative sales, which is most significant.

28.     Mr Trevethick, in his report of 26 November 2005, set out two methods of establishing a comparison between the subject property and the representative properties.  The first method involved adopting a value of $210 per square foot of the land and building in question.  The second method was to place a value of $75,000 on each main room in the subject building.  Both the rate per square foot of land and the room rate are derived from the corresponding values of the representative properties.  The rate per square foot of the representative properties varied between $268 per square foot and $444 per square foot, while the value calculated per main room varied between $86,857 and $130,000. 

29.     However, Mr Trevethick miscalculated the size of the land on the Nicholson Street Property.  He inadvertently included a small lane giving access to the rear of the property and a lock-up garage.  By using an incorrect size of 362 square metres and a rate of $210 per square foot, he arrived at a value of $818,370.  Mr Trevethick subsequently conceded that the area of the subject property is about 302 square metres.  Nevertheless, he said in evidence that the revised area did not alter his valuation of $820,000.  Mr Trevethick said he took this stance because he had primarily assessed the value of the Nicholson Street property by the value per main room method.  He said that the rate per square foot of land valuation method was merely secondary.  However, there is nothing in his written report to suggest that one method was primary and the other secondary.  In fact, the first methodology in his report is the rate per square foot method and the second methodology set out in his report is the rate per main room, which valued the property at $825,000. 

30.     By my calculation, if one were to apply Mr Trevethick’s rate of $210 per square foot or $2260.42 per square metre over 302 square metres, the value arrived at is $682,646.  It seems to me that if one were to use that method of valuation, it would equate very closely with the value arrived at by Mr Dunn.  Therefore, in my view, Mr Trevethick belatedly decided that using the rate per square foot method was not sufficiently accurate.  It should also be remembered that Mr Trevethick, when conducting a kerb-side valuation of the Nicholson Street Property, valued it at $820,000.  It would, in my opinion, be quite extraordinary that, following an examination of representative sales in the area and using a rate per square foot and a rate per main room methodology, he would arrive at approximately the same figure as his kerb-side valuation.  After all, the internal condition of a dwelling, as is evidenced by the representative sales data, will clearly have substantial influence on the value of the property.

31.     I also have some difficulty with Mr Trevethick’s room rate methodology.  As is evidenced by the large variation between the rates ascribed to main rooms in the representative properties, that value, although easy to calculate on the sale price of a property, is not so easy to predict where the variables which influence the figure are not available.  Mr Trevethick agreed that in arriving at a figure of $75,000 per main room he used his judgment and took account of the size of the building.  As Mr Dunn said in evidence, a valuation is generally based on the experience of the valuer and his or her familiarity with that particular area.  Given that Mr Dunn has had considerably more experience valuing properties in this area, I am inclined to rely on his valuation rather than that of Mr Trevethick.

CONCLUSION

32.     In my view, Mr Dunn’s valuation is to be preferred to that of Mr Trevethick.  Mr Dunn has had significant experience valuing properties in the Fitzroy area and I prefer his analysis to that of Mr Trevethick.  I also had some difficulty in accepting Mr Trevethick’s evidence that his valuation was principally based on the valuation per main room method.  The first method which he adopted in his written report was a rate per square foot method and, although he admitted in evidence that he had miscalculated the area of the subject property, he persisted with his view that the substantial variation, a reduction of approximately one-sixth of the total area, did not effect his valuation.  This was despite the fact that he admitted that when using the value per main room method, he nevertheless kept in the back of his mind the size of the land.  In my view, the size of the land upon which a dwelling is built is a significant factor in establishing its value.  If Mr Trevethick’s rate per square foot is used over the correct land area to calculate value, the figure arrived at is remarkably close to the valuation adopted by Mr Dunn.  I am therefore satisfied that the correct valuation of the Nicholson Street property is $690,000.

33.     The decision of the SSAT made on 15 February 2006 should be set aside and the matter remitted to the Secretary for reconsideration on the basis that the Nicholson Street property is valued at $690,000.

I certify that the thirty-three [33] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr Egon Fice, Member

(sgd)       Lydia Zozula

Associate

Date of Hearing:  14 July 2006

Date of Decision:  31 July 2006

Solicitor for the applicant:            Mr P. Dinning, Baker and Armstrong

Advocate for the respondent:       Ms J. Hume, Legal Services Branch, Centrelink