Friday, August 10, 2012

How risky is your home? (updated)

Indefatigable blogger and twitterer Christopher Joye is now a regular contributor at the AFR. This weekends contribution includes comparison of an individual property with the broad real estate measures usually reported by  the media. This will likely be paywalled is open access and recommended weekend reading: Housing risk: it's greater than you think?




Academics, policymakers and the media almost always confuse the risk profile of a well-diversified house price index, which proxies for millions of homes, with the probability of loss that you are exposed to when you acquire an individual asset.
They are worlds apart.
Another worrying flaw in analysis of housing risk is that researchers assume we are “ungeared”. That is, they tend to overlook the direct impact of leverage (i.e., home loans) on investment outcomes. So they measure the variability of a house price index and suppose this can be used to represent an individual owner’s “equity’ risk”. They are wrong.

Research of this kind has been common for equites but missing in real estate. Media reports frequently misrepresent increases in simple broad median prices as reflecting capital gains. Median prices are a crude and distorted measure compared to more sophisticated measures now available such as the RP Data hedonic index or the Case-Shiller index in the USA. There are several related themes here that I will hold on for now.

Not close to being as sophisticated, but related to the Loose Change jihad on land valuations, strata property, and council rates in Cairns is a quick chart based on land valuations from the Valuer-General over the last decade. This is not a property market value but compares changes in land valuation only of my own bohemian Esplanade strata abode with the Cairns Council region, also related to CPI.
 


Guess when differential rating for strata units was introduced to boost Council rates revenue from units?



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