RDP 2014-04: Home Price Beliefs in Australia 9. Conclusion

In contrast to the existing literature, this paper provides an approach to measuring home valuation differences that is free of recollection bias. We also study the determinants of valuation differences and whether valuation differences are important for economic decisions.

We find that homeowners' housing price beliefs – measured at the postcode level – are generally unbiased. However, there is significant variation around this unbiased mean: while around half of all postcodes provide an average valuation within 11 per cent of the average market value, about one-quarter of postcodes provide valuations that are more than 20 per cent away from the average market value.

Household characterisics including age and tenure, and local area characteristics, such as the regional unemployment rate, are able to explain some of the variation between homeowner beliefs and home prices. The results suggest that the unemployment rate affects the bias of beliefs, while tenure affects the accuracy of beliefs.

The extent of overvaluation is positively correlated with household spending and leverage. Homeowners that appear to overvalue 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. Our findings suggest that beliefs about home values affect household financial decisions.