The IP -> location mapping is googles secret sauce, but it collects data from a lot of places, and is for most users very accurate. We're talking street level accuracy in many cases. The data you or another user feeds into it you could easily get back as your reported location, especially if you were trying to fool it.

Your phone doing a wifi scan for nearby access points to determine it's own location, then doing a google search could easily mark your whole home external IP as being in that place (after a few hours), which would then affect non-signed in google services from other devices in your home.

There are cases it's very bad too though, especially VPN's and frequently-shifting dynamic IP's.