Making House Price Predictions

The British public have an insatiable appetite for property price predictions. This is hardly surprising since for many their home is also their largest financial investment. For others getting on the ladder is a constant preoccupation.

The media is only too happy to oblige with regular stories based on the calculations of "experts". In The Media and Property Prices misreporting by the press, and the reasons they do it, is covered. But who are these organizations that they use and how accurate has their track record been?

For clarity where 'real' price changes are stated below these are from the Land Registry and the predictions of each party are their first predictions, not ones that they updated during the year.

The Property Experts in Which we Trust

The Royal Society of Chartered Surveyors (RICS)

RICS system for predicting the future would have most statisticians turning pale. They simply ask their members "how they feel". If most are optimistic they believe prices will rise and if most are pessimistic they say prices will fall.

Strangely it actually seems to work but only to the extent that they have been quite successful in staying on the right side of zero - they say prices will rise and they do, they will fall and they do.

• Prices rose 9% and 2% respectfully in 2006 and 2007 compared to RICS prediction of 4% and 7%.
• In 2008 prices dropped 13% compared to their prediction of a 5% decrease.
• At the start of 2009 they predicted a 20% drop but later revised this to zero, which then matched the real market.

Despite not being particularly accurate RICS is actually one of the better indicators on the market. But if even they have to reverse predictions to the extent they did in 2009 perhaps they are not to be relied on.

The Nationwide

The Nationwide has been collecting house price data since the early 1970s. As a lender they are able to see the number of applications coming in for approval and this gives an indicator of changes coming in the market. If less people are applying the market is beginning to slow and hence house prices may fall, so long as you assume supply remains constant.

Unfortunately this simple "supply-demand" argument does not always work. If demand slows prices can only drop if supply remains the same or increases. But unlike fruit and vegetables houses are not perishable goods and so, as seen in 2009, supply can dry up as well and match the lack of demand.

Because of this they have had little success in predicting. In 2007 prices rose 2%, they said it would be 5%. In 2008 they thought the market would be static but it dropped 13%. In an attempt to catch up they suggested this decrease would be repeated in 2009 but in a true reversal prices remained static.

The Halifax

The Halifax and the Nationwide are both famous for issuing their monthly year on year price change data. And historically they both have sound data on a national scale but accurate predictions have eluded the Halifax as well. In 2007 they thought the market would move up 5% when it actually moved 2%. They thought prices would be static in 2008 but they dropped 13%.

The Council of Mortgage Lenders

Like the Halifax and the Nationwide the CML has a close grip on the number of new mortgage applications being received across the industry and use this, in part, to predict if the market will be moving up or down in the future.

But as with the Halifax and the Nationwide they can be good at predicting future demand, but cannot know what future supply will be. As such they have not been far off the mark but their track record does not make them particularly accurate when looking for some guidance as to the future.

Housepricecrash.co.uk

Set up to discuss the impending house crash the site bought together lots of data from 2004 onwards to prove prices must decrease. Since then they have been unstoppable in their belief that values must fall 50% and that this will generally happen at a rate of 10-15% per year.

Jonathan Davis, who runs the site, has been extremely forthright since day one. In 2004, on the site's forum he replied to a post from a user who was about to buy and said, "So, late 2005 to mid 2006 when HPs are falling by 10-15% pa you're going to buy a place?"

Obviously historical data has not been in their favour although in 2008 prices did move down 13% matching their prediction for one of five years.

Perhaps the site should be more accurately renamed wewantahousepricecrash.co.uk

Hometrack.co.uk

Hometrack collects data from estate agents including questions on where they think the market is going. From this they issue predictions which have largely been conservative but wrong. In 2006 they suggested a rise of 1% compared to the 9% that actually occurred, 4% up for 2007 when prices rose 2% and a 1% increase for 2008 when prices dropped 13%.

Capital Economics

Perhaps the most well known gloom-sayer is Capital Economics, advised by Roger Bootle. They tend to predict price decreases almost all the time. And when house prices are decreasing they predict even larger falls. Their track record for accuracy is disastrous as the following shows:

• Predicted a 20% fall between 2005 and 2007. Prices rose 15%.
• In December 2004 Ed Stansfield (spokesman for Capital Economics) said "our forecast of a 20% peak-to-trough drop in average house prices - remains on track." Prices rose 15% over the next two years.
• At the start of 2009 they predicted a fall of 20% for the year. Prices remained static

In December 2007 the BBC reported "To date they have been about as wide off the mark as is possible." Which puts it mildly and questions why they are still asked for their views. Ironically after nearly a decade of predicting a crash, and as house prices stood on the precipice in April 2007, Ed Stansfield from Capital Economics said "It gets to a stage when you can't keep saying a crash will happen while prices keep on rising". The following year prices dropped 13%.

With such a poor track record it is strange that the media would turn again and again to such a company for predictions on the future but they continue to do so.

In summary Capital Economics have been one of the worst predictors of house price movement in the past so be extremely sceptical of any article based on their predictions for the future.

Deloitte

Deloitte is also advised by the same Roger Bootle of Capital Economics and hence why their predictions are broadly similar. For the same reason they have a poor track record their predictions should be treated with scepticism.

Zoopla.co.uk

Zoopla was started in 2007 and the idea was to use historical data and a "secret cocktail of other factors" to make predictions about the market both on a national and local level.

You can get the rest of this chapter,
and all the others, when you
purchase the ebookHow to Really Buy a Property