House price slide highlights houses may be a risky asset

Tuesday, 6 December 2011  Media Alerts

Michael Sherris, a Professor of Actuarial Studies at Australian School of Business, says "the recent international credit crisis has shown the vulnerability to major market collapses in residential property prices of both individuals and financial institutions such as banks who lend to finance residential property. Australia is not immune to global events, and many people may be more exposed than they expect."

Australian house prices are falling at an accelerating rate according to data from RP Data-Rismark, with Sydney's dwelling values down 1.4 per cent in 2011. For the nation, seasonally adjusted home prices have dropped 4 per cent so far in 2011, and are forecast to fall much further.

Michael Sherris says this is an area of concern for many homeowners. "Residential property is a major component of individual savings in many countries including Australia. Home ownership is high however property values are not as observable as share prices and other financial assets where individuals save. That's why we need much more data on where and by how much there has been a fall."

After years on a pricing plateau due to a shortage of supply, when many people saw housing as a good way to save for old age and safer than money in the bank, Australian domestic house prices are now steadily falling. That is causing risks for those with a small deposit, and homeowners with large mortgages, or poor loan-to-value ratios. He says "in effect, some homeowners who thought they were saving are now seeing much of the equity in their home evaporate. It can be even more of a rollercoaster ride than the stock market."

According to data analysed in the study, the highest returns were realised in Sydney's Central Business District and along the harbour area. If treated as an asset, houses there have an average annual return of over ten percent, beating many other investments. However in other areas, the returns are much lower. It also depends when you 'realise your assets' - or sell your house. "There are significant above-average sales results in the second and fourth quarter and significant below-average sales in the first quarter."

Michael Sherris says when evaluating the risk, a broader assessment than just national house price indices is needed. "Most assessment of risk and growth in property prices is based on market wide indices yet the performance of residential property can be regionalised and it does vary across postcodes and individual houses. The new research shows how applying the latest statistical modelling techniques at a postcode level can indicate how risky it is to just take an overview of house prices. It is important to understand how prices vary with postcodes and the overall market which identify the key factors that drive price growth and risks."

Details of the study are at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961402.

For further details contact Michael Sherris on 02 9385 2333 or m.sherris@unsw.edu.au.

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