Chapter 3: Making House Price Predictions

This is an extract from the ebook How to Really Buy a Property.

What's covered in this chapter
  • Who makes house price predictions;
  • What is the track record of RICS, the Nationwide, the Halifax, the Council of Mortgage Lenders, Hometrack, Capital Economics and many of the other 'experts' used by the media;
  • Who can make accurate forecasts;
  • Why organisations make 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 Chapter 2: 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 given 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.
  • After the 2009 suprise RICS 2010 forecast was simply to say 'further price gains over the coming months' which indeed they did to end the year 1.5% higher.
  • 2011 was their most accurate year yet suggesting prices would fall and then rise ending the year 2% down. The reality was -1.3% making this their best forecast yet.
  • In 2012 they went for 'static' while prices increased 1.7% which is close.
  • 2013 saw them go off track again predicting a 2% rise when prices increased 4% but their 2014 8% prediction was spot on.

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 too heavily.

In recent times their monthly reporting has also suffered from inconsistency. On 10th January 2012 RICS said 'There is no sign of the UK property market picking up in the coming months' which was followed on the 14th February with 'Home sales are expected to rise'.

In 2015 they successfully predicted prices would rise by 3% (only 1% of the reality) but their regional claims were way off the mark. Their view was that London property would stagnate but prices rose 12%.

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. Circling the wagons they predicted prices would remain static in 2010, 2011 and 2012 and, with the actual change being +1.5%, -1.3% and 1.7% respectively, they were close.

But when prices moved up 4% in 2013 their continued 'static' prediction was wide of the mark. Since then they have avoiding stating specific percentages and gone for vaguer statements such as their 2015 prediction that "If the economic backdrop continues to improve as we and most forecasters expect, activity in the housing market is likely to regain momentum in the months ahead".

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%.

For 2009 Halifax threw in the towel and refused to provide a forecast for the future claiming the market was too volatile. In 2010 and 2011 the Halifax went for 'no change' in a similar way to their main competitor, Nationwide, and achieved similar success. Perhaps learning from this their 2012 best guess was from -2 to +2% and by keeping it broad they got it right as prices moved up 1.72%.

In 2013 the Halifax kept to their wide -2 to +2% while prices rose 4%. By offering such a range in their predictions they have managed to keep one edge close to reality but then it is hardly a prediction.

Again in 2014 they kept their options open with a 4% to 8% rise but when you offer such wide margins you do have a pretty good chance of hitting the target! In 2015 they went for 5% which was pretty close to the 4% reality.

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.

Recognizing this themselves there have been times, such as 2009 and 2010, when they refused to even offer a prediction. For 2011 the vague approach was used with a forecast of "may fall a bit or stay flat" which may not even technically be a forecast!

For 2013 they went for a no change prediction. Prices moved up 4%.

For 2014 the CML started to predict volumes of mortgage lending instead of house price moves and for 2015 limited their forecast to "more slowly".

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 ran 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 was not in their favour but in 2008 prices did start to fall and at 13% it finally matched the 10-15% prediction which prompted a raft of media reporters to suddenly hail Davis as the man who knew. But his forecast was actually for a 40-50% drop between 2008 and 2011 and in reality the market only moved 4% down over this time period.

He has since removed this forecast and his name from the website which should perhaps be more accurately renamed

Jonathan Davis Wealth Management

Davis moved on from and started to be quoted as 'Jonathan Davis of Jonathan Davis Wealth Management.

Never one to give up Davis predicted a 10% drop in 2011 itself which was far from the -1.3% reality.