Michael Sherris

The two latest house price surveys show a continuing decline in Australian real estate prices.

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 0.2% in December.

A similar finding from the ABS this morning says the weighted price average of eight capital cities Is down 4.8% over the year, with Sydney falling 4.8%.

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 to assess where and by how much there has been a fall and not just rely on market wide indices.

The December decline in house prices came just a month after house prices rose for the first time in a year in November. That gain was supported by two interest rate cuts by the Reserve Bank of Australia, and occurred ahead of the removal of a tax exemption for certain purchases.

It is however still possible to make a profit from housing in Sydney. Figures show 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 – such as shares. However, even though there may be half the volatility that you get with shares, it is still a risk. Many people think there’s no volatility at all, however if you put a large proportion of your money into one particular investment – such as your house – it is a risky position, particularly if you’re also heavily leveraged with a large mortgage.

Baby boomers and other retirees who may be considering unlocking the equity in their house should take the risks as well as the potential returns into account in assessing products such as reverse mortgages.

Michael Sherris is a Professor of Actuarial Studies at Australian School of Business.