How house price predictions actually work and why they are often wrong

How much confidence should you have in predictions about falling home prices?

Fun facts about the horrifying prediction of a six-digit drop in house prices across the country: they’re kind of a hoax.

Hocus pocus, mumbo jumbo, take your pick.

They are still important.

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We won’t go into every forecast, but in a June quarter release, the economics team at NAB, Australia’s third largest lender, expected home prices across the country to fall nearly 18% by the end of 2023. I was.

In Sydney and Melbourne, banks expected hits of 22.2% and 21.8%.

Also last week, PropTrack (the research arm of realestate.com.au) predicted that typical US home prices would fall between 9% and 15% by the end of 2023.

Sydney and Melbourne were even worse, in the 12-18% range.

A hand holds a red arrow down over a wooden house. house is decreasing. The concept of falling supply and demand in the real estate market. economic crisis. falling prices.

If you ask most economists, they predict a dire future for house prices, but that’s far from certain.

Especially if you recently bought it and such a decline could leave you in debt beyond what your home is worth.

But as long as the average mortgage recipient keeps paying the mortgage, the banks don’t care.

In large part because the forecast is based on indices populated with theoretical data.

The index is math-heavy, calculating the value of all homes in a given area using more ambiguous factors such as recent sales data, individual rental vacancies, and recent changes in interest rates. structure. That includes your location, even if it was last sold in the 1990s.

Once this is complete, economists will be able to add even more variables and data points to capture far-flung things, from the impact of Ukraine’s war on energy prices to China’s lockdown impacting supply chains. .

Property Market Crash - Falling Home Prices

There’s some truth to the home price decline predictions, and we’re already seeing a decline. The big question is how far do they actually fall.

Proptrack economist Paul Ryan said the company only started forecasting only recently, but the model’s history in Australia has been “pretty poor”. If you do, you’re wrong about everything else,” says Ryan.

Ray White’s Chief Economist, Nerida Conisby, is not predicting any specific price declines because of the difficulty.

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

She pointed to the latest tranches of negative market forecasts made during the early lockdowns of the pandemic.

concept australia attacked by coronavirus army

Predictions that the Covid-19 pandemic would wreck home prices were completely wrong.

Even now, prices have fallen in Sydney and Melbourne, but are still rising in Adelaide, she added.

Nonetheless, she noted that the trends are likely to be accurate: prices have fallen in many areas and will continue to fall.

But for all their fools, prediction is still important.

For one thing, banks aren’t just creating them to scare customers, they’re using them to set rules against lending.

It’s unclear whether these clauses materially affect what the bank will lend you, but Ryan said that the current figures show that before a bank decides how much to lend you, your cost of living and equity He said it was likely an indication that he was looking at his position quite carefully.

Mortgage and home buying concept.Little female character with giant calculator and percent sign in house with gold coins

Home equity is marked down by banks, so if you’re planning to leverage your assets, it could be impacted.

If you plan to take advantage of the equity in your home, such as to buy it for investment or to help with the purchase of your children, it could also have an impact, and lenders could depreciate that equity in the coming months. There is a possibility

But for most of us, these predictions are nothing to worry about. These are just myths.

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How house price predictions actually work and why they are often wrong

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