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How accurate are housing market price forecasts?

When it comes to the wider Australian housing market, the number of factors that are said to affect the market level price is as varied as there are opinions put forward as to how, and to what extent, these factors affect the price.

Say you subscribe to the behavioural finance theory (that broadly proposes individuals in the market do not all react identically to the same information) and also view the housing market as an inefficient, cyclical market.

Then in all likelihood you would view with some scepticism anyone telling you that, say, a 0.25% rise in interest rates (or the AUD appreciating 5 cent or the net population growth decreasing 0.1% or the…) WILL result a 7.5% drop in housing market price level on the 10 March 2016. 

Whilst one may be able to get some consensus amongst experts about the top 5 systemic (i.e. market wide) factors that affected the housing market price level in the past, it will be harder to get agreement on what this top 5 will be in the future – and even harder to agree how and to what extent these factors will affect the price level in the future.

Why?

Quite simply because, firstly, in an increasingly globalized economy it would be foolhardy to rule out a systemic factor simply on the basis that it had no previous causal correlation with housing prices, and secondly, it would be difficult to evaluate the timing and impact that any government intervention in response may have.

So, in other words, you couldn’t be certain what else could impact housing prices in the future and how this impact may be then be moderated by government policy.

One opinion is that the key systemic factors driving the housing market can be grouped into: the wider economy, population demographics, interest rates and government policies.

Theorising as to the expected direction of the impact that a single systemic factor grouping, in isolation, is likely to have is relatively simply. 

Take the AUD – that is currently sitting at its lowest levels since April 2009. A lower AUD, generally encourages exports and makes imports more expensive. Purely from a capital flow viewpoint, less local capital is likely flow off-shore and more foreign capital is likely to flow in which is likely to result in more demand of AUD denominated assets including Australian housing – in isolation, a likely stimulatory impact on prices. From a production input viewpoint, all imported building inputs will now be more expensive and therefore the cost of supply will rise – again, by itself a stimulatory impact on prices.

But each of the systemic factor groupings is be-spoked (the wider economy into currency markets, alternate capital markets, labour market, construction industry etc. and each of these elements into further elements such as labour market supply and demand etc.) and therefore even forecasting the likely future outcome for even a single factor is a complex exercise.

In other words, forecasting even a range of future price outcomes built on a series of uncertain assumptions as to the individual and combined likely future outcomes of the key systemic factors that may be applicable at the time is, at best, an educated guess.

As to more definitive statements, such as ‘housing market prices expected to fall 7.5% by 2016’, the less said the better.

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