Why most predictions about the property market are (embarrassingly) wrong

Last updated: 30 December 2021

In the last issue of The Property Hub Magazine I looked back at the embarrassing inaccuracy of most property price forecasts over the years. On episode 413 of The Property Podcast we dug deeper into this, and identified an overarching cause for much of this wrongness as being failure to see the big picture 

There are two important ‘big picture’ elements for property investors to understand: government incentives, and the macroeconomic environment. 

The role of government in the property market 

The government can’t determine exactly what happens in the housing market, but they can implement policies that have significant effects on it. When they enact these policies, they do so with the strong incentive to keep prices up: steady or rising house prices make people feel wealthier and therefore more likely to vote for the incumbent party, and makes them more likely to spend and therefore increase GDP.  

Increasingly the government has a stake in the housing market itself via various equity and loan guarantee schemes, so a significant drop would have a direct impact on the country’s balance sheet too. 

This doesn’t mean they can prevent prices from falling forever, but it does mean they’re motivated to help the market through schemes like extending the Stamp Duty holiday and providing guarantees so lenders can offer 95% mortgages. This, of course, is exactly what they did in the Budget in March. 

Immediately after these policies were announced, Capital Economics – a major economic research consultancy – threw out their prediction that house prices would fall by 5% in 2021, and said that they no longer believed there would be a fall at all. 

For an organisation that supposedly researches economics, failing to foresee the likelihood of this type of government action and factor it into their earlier prediction is astonishing. It should’ve been obvious that – because of incentives I’ve just described – the government would use any levers at their disposal to prevent prices from falling. 

(Incidentally, it’s hard to argue that intervening in the market to keep prices up is a social good – but I’m talking about what will happen, not what should happen.) 

The macroeconomic environment 

And then there’s the impact of macroeconomics on the property market – which is very much linked to government and central bank action. 

In the run-up to the Budget, there was much hand-wringing about how “we need to pay back the debt” that was incurred to pay for furlough and various other Covid-related schemes, and speculation about a whole range of tax rises to make that happen.  

In reality, none of the debt incurred during 2020 is “real” debt as you’d think of it: it’s money notionally owed to the Bank of England that bears no interest and can be rolled on forever or cancelled without consequence. We discussed this in episode 414 of The Property Podcast, which is a must-listen if you’re not familiar with how Quantitative Easing works. 

As we discuss in the episode, this “money-printing” is supportive of high prices, so by keeping an eye on what stimulus the Bank of England is planning, you can get clues about what could happen in the property market and other asset markets. 

Understanding macroeconomics also gives you insight into the future of interest rates – the level of which also has a huge bearing on asset prices. You can understand why governments are motivated to keep them low (clue: Rishi Sunak said in his budget that “just a 1% increase would now cost us over £25bn”), and what might force them higher (answer: inflation).  

You can beat the professionals 

Professional forecasters clearly fail to correctly account for these ‘big picture’ factors, which is why they’re so consistently wrong. But the only consequence for them is possibly mild embarrassment when some smartarse in a magazine highlights it years later. 

For you as a property investor, the consequences are far more serious: they’re financial, either in terms of losses from investing at the wrong time or the opportunity cost of staying out of the market due to misplaced fear. 

Rightly or wrongly, government actions and the global economic environment now have a more significant impact on the performance of your investments than ever before. As a result, developing this ‘big picture’ understanding should now be a key part of every investor’s skillset. By combining the big picture with ‘ground level’ knowledge and plenty of hard work, you’ll be in the perfect position to make the right investment decisions in any environment. 

This article first appeared in The Property Hub Magazine.