How house price forecasts are actually made and why they are often wrong

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Fun fact about all those terrifying predictions of house prices falling to six figures nationwide: they’re kind of made up.

Hocus pocus, mumbo jumbo, whatever you prefer.

They’re still important, mind you, they’re just not, well, real.

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I won’t go into all the forecasts, but in their June quarter release, the economics team at Australia’s third-largest lender, NAB, predicted an almost 18% loss in home values ​​at the nationwide by the end of 2023.

In Sydney and Melbourne, the bank forecast an impact of 22.2% and 21.8%.

And it was only last week that PropTrack (the research arm of realestate.com.au) predicted that the country’s typical home value would fall between 9 and 15 per cent by the end of 2023.

Again, it was worse in Sydney and Melbourne, ranging from 12% to 18%.

These are sobering numbers, especially if you bought recently and that kind of drop could cost you more than your house is worth.

But as long as the average home loan recipient continues to pay their mortgage, the bank won’t care.

This is largely because the predictions are based on an index filled with theoretical data.

An index is a heavy mathematical construct that uses recent sales data, along with separate rental vacancy figures and more nebulous factors such as recent changes in interest rates, to calculate the value of each home in an area. given. This includes your home, even if it was last sold in the 1990s.

Once that’s done, economists add even more variables and data points that could capture things as far-reaching as the impact of the war in Ukraine on energy prices to lockdowns in China affecting supply chains. supply.

PropTrack economist Paul Ryan said the firm had only recently started making predictions, but Australia’s model history was “pretty poor”. “If you get one predictor variable wrong, you get everything else wrong,” Ryan said.

Ray White’s chief economist, Nerida Conisbee, made no predictions about specific downgrades, due to the difficulty.

“If you get the direction right, you’re doing pretty well, but getting the scale right is nearly impossible,” Ms Conisbee said.

She pointed to the most recent slice of negative market forecasts, made amid the lockdowns of the early days of the pandemic: “There were forecasts of a 30% price drop, but they went the other way meaning”.

Even now, as prices are falling in Sydney and Melbourne, they are still rising in Adelaide, she added.

Despite this, she noted that the trend is likely to be accurate – prices in many areas are falling and will continue to fall.

But despite all their weaknesses, predictions are still important.

For one thing, banks don’t just produce them to scare off their customers — they also use them to build up provisions against loans.

While it’s unclear whether these provisions materially affect what a bank will lend you, Ryan noted that current figures would likely indicate that banks would be looking closely at your living expenses and net worth before deciding on amount they would lend you.

There could also be impacts if you plan to dip into the equity in your home, for example for an investment purchase or to help your children buy, as your lender is likely to assess this value down in the coming months.

But, for the vast majority of us, these predictions are nothing to worry about – they are just made up numbers.

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Originally published as How house price forecasts are actually made and why they are often wrong

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