‘Useless house price forecasts’: rubbishing the rubbisher
We wrote (from No Monkey Business Limited, as financial advisers who do make forecasts of house prices) to the Financial Times letters editor, as follows, in response to an article by economist John Kay rubbishing attempts to forecast house prices. The technical basis for forecasting house prices referred to in the letter, using regression analysis of long time series data for average prices deflated by general inflation, is not new to this site. It is not a perfect model but it makes a lot more sense than blindly assuming that house prices are somehow immune from laws affecting other asset prices.
John Kay is dismissive of those who forecast house prices (Pay no attention to useless house price forecasts, 7th November). Has he fallen into the trap of suspending disbelief when it comes to the price (or value) of the land we call our own?
He contrasts the predictability of homes and equities. Accepting the impossibility of making accurate short-term forecasts, he nonetheless embraces the usefulness of longer-period equity return forecasts that assume reversion to the mean. Mean reversion is a statistical property shared by deflated time series for both assets and John’s arguments for accepting it for equities but not for house prices are not persuasive. The distinctions he makes about aspirational and positional goods are mainly relevant to relative property prices, much as individual companies and sectors explain relative equity prices.
The Nationwide price index of the changing ‘average home’ since 1957, deflated by general inflation, shows cycles around a long-term trend which has altered little from 2% pa. The fact that this trend is close to real incomes growth is unlikely to be a coincidence. But it is wise, even without understanding perfectly (or modeling) the causes, to respect the persistency of the trend. The deviations from trend appear consistent with money and credit cycles but, relative to real equity prices, they are smaller and show varying leads and lags. The deviations also contain useful information without understanding the causes perfectly.
The present deviation, whether or not you choose to call it a bubble, is extreme yet not unprecedented. For young people choosing between renting and buying, amateur buy-to-let investors and anyone planning to trade up or down, the trade-off between housing and their other financial objectives is, in these market conditions, a problem that needs a solution. Financial planners cannot avoid making long-term forecasts, or saying something about the short term, if we are to inform these personal choices. Waiting for economists to plug this glaring gap in the scope of asset-price modeling is what would be useless.
Stuart Fowler Managing Director, No Monkey Business Limited