Sunday, March 10, 2013

How well do home‐owners know the value of their homes?

Not that well, and in the outer suburbs it's even worse

Our homes are worth less than we think, around $100 billion less Australia-wide.

New research published in the Australian Economic Review finds Australians typically overestimate the value of their homes by 2.5 per cent. The ones who do it the most are young, living in so-called McMansions on the fringes of Sydney, Brisbane and Perth.

Daniel Melser, a senior economist at Moody's Analytics conducted the research while at the University of Technology Sydney.

“It means our wealth statistics are wrong,” he says. “All the wealth statistics are based on owners estimates of the value of their homes, not the actual values.”

“And it means people are at risk of making bad decisions, like deciding they can afford overseas holidays when they can’t or afford to retire early.”

Dr Melser examined the results of a regular survey about estimates of household wealth and compared them to the prices the people being questioned had actually paid for their houses, adjusted for price growth.

He found most of the overestimation took place in the outer suburbs of Sydney, Brisbane and Perth, with comparatively little in Melbourne in Adelaide...

The owners of big homes (with four or more bedrooms) were by far the most optimistic, typically thinking their homes were worth 5.3 per cent more than they were.

“We are talking about McMansions I guess,” Dr Melser said. “Big homes are a worth a lot to the people who live in them but not everyone loves big homes,” he said. “It’s a bit like the old idea that you paint a wall pink because you love pink and you capitalise that into your idea of the value of the house, but not everyone loves pink.”

Big houses tend to be further away from city centres, worth less to buyers than they are to the people who live in them.

Older Australians more likely than young Australians to realistically value their homes, perhaps even undervaluing them, Dr Melser says. An Australian aged 30 is likely to value a house at around 6.6 per cent more than an Australian aged 70.

“The cut off point seems to be around the age of 50,” he says. “People younger than that overestimate what their homes are worth. Beyond that they have a pretty good idea.”

In today's Sun Herald

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