How you value your home affects financial decisions

by AB26 May 2014
Research on the impact of homeowners overvaluing or undervaluing their house has found a certain belief about home values affects household financial decisions.

Reserve Bank of Australia’s economic research department has released a report on home price beliefs in Australia.

The report’s authors, Callan Windsor, Gianni La Cava and James Hansen, say timely data on the prices of individual homes is not readily available, and so homeowners must form a belief about the value of their home when making economic decisions.

“Self-assessed home values sourced from household surveys are the main source of data used to measure the distribution of household wealth (and related financial indicators, such as leverage) in Australia. If homeowners do not accurately value their homes, then survey measures of household wealth may be biased,” the authors said.

Their research found half of the average home valuations fall within 11% of the average market value across postcodes, but one-quarter of postcodes provide valuations that are more than 20% away from the average market value.

Certain average household characteristics are linked with valuation differences, they found.

In particular, postcodes with older homeowners are more prone to overvalue their homes, but postcodes in which homeowners have lived in their homes for a relatively long time or in regions with relatively high unemployment are more likely to undervalue their homes.

Interestingly, the researchers discovered homeowners who overvalued their homes typically spend more and are more leveraged than owners who appear unbiased.

In contrast, homeowners that appear to undervalue their homes spend less and are less leveraged relative to the same reference group.
The findings suggest that beliefs about home values affect household financial decisions.