7 common mistakes when forecasting property values

Property values are all about demand and supply, but obviously it’s a bit more nuanced than that. Here are the most common reasons why a lot of property forecasters get it so wrong.

There is absolutely no shortage of data or commentary when it comes to the property market or forecasts about where it’s going. I often say that property values are all about demand and supply, but obviously it’s a bit more nuanced than that.

It’s why I was fascinated by this report from Ray White chief economist, Nerida Conisbee, who looked at the most common reasons as to why a lot of property forecasters can get it so wrong. I really rate Nerida, which is why I think this is worth a read.

1. Assuming that house price movements are consistently driven by the same things

House prices are more sensitive to some things than others. There is a tendency to over-emphasise one factor over another. In the most recent cycle, the main thing that many got wrong was putting an over-emphasis on interest rate changes, but ignoring housing shortages and population growth.

2. Assuming that what drove prices up will also push them back down

What drove prices up doesn’t necessarily drive them back down again. During the pandemic, Australia lost people to overseas and population growth was very low. At the same time, prices increased dramatically primarily because the cost of finance was so cheap and people weren’t spending as much on other things. As interest rates started to rise, many assumed that prices would move back in the exact same direction. While this happened a bit, the bounce back in population growth prevented a dramatic fall.

3. Assuming that all housing markets are the same

House prices can be falling in one city but increasing in another. Even more locally, this can happen in adjacent suburbs. Different markets have different drivers. Cities like Perth are more sensitive to the commodities cycles, whereas Melbourne and Sydney move more closely with interest rates. Head to small regional towns and the addition of a new employer or a strong agricultural year can make a difference. At a very localised level, a new café or new form of public transport can drive up prices.

4. Perception that house prices swing around dramatically

The cost of transacting and the speed of sale and settlement make housing a far less volatile investment to easily traded shares. This makes house prices far less volatile to a change in conditions.

5. Look at housing markets in the same way as financial markets

Financial factors do drive housing markets, but demographic change is also a factor. In fact, many changes to property markets beyond residential are heavily influenced by changes to the way people live and work. Shopping centres can do well in a poor retail trade environment if there is strong population growth. Industrial property is doing well because of changes in the way we are shopping.

6. Don’t understand the consumer response

Building a model to forecast house prices is difficult. A simple model utilising population growth, number of dwellings and cost of finance will ignore a lot of what drives consumers when buying and selling homes. Selling the family home is a big deal and spending on other things will be reduced first before selling. This cycle, many investors have not sold because rents have increased, helping with mortgage payments.

7. Underestimate long term trends

Long term preference changes drive property markets. The pandemic led to the highest movement to regional areas ever recorded, leading many to believe that regional pricing would come back down quickly as pandemic restrictions faded. This hasn’t happened and reflects that this regional movement was already happening prior to the pandemic. It also reflects that it wasn’t just pandemic movement that led to price rises, strong performance in mining and agriculture contributed as well.

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