The Inaccuracy Of Property Price Forecasts And What To Do About It

However, I'm not going to remind you what the latest property-price forecasts from the UK's best-known economists are for 2025 or the next 12 months. If you want to know, you'll have to look them up yourselves.

Here's why…

What happened in 2024?

To start with, let's take a minute to look at what happened last year.

The UK House Price Index (HPI) shows that property prices rose 4.6% in 2024. Here's a table showing the accuracy of the first 10 forecasts for 2024 that I could find in a quick internet search:

When I notice that someone has done a reasonable forecasting job, I scan earlier years to see if they have been consistent. I could find nothing for the two-out-of-10 forecasters above that were quite close last year.

Not to pick on any one in the above list on purpose, but, in mid-2023, Charlie Lamdin even said that prices over roughly three years to the end of 2025 would be down by 35%. As we come towards the end of those three years, the worst fall in the period so far was slightly less than 5%. Prices are higher now than at the beginning.

Prices rose in 2024, when Lamdin said that the “worst of the falls” would become apparent. (Clearly, by the time of his prediction above – which was half a year later – he had softened his projection, as he was now stating just -5% in 2024. And he was still wrong by nearly 10 percentage points.)

He finished by saying falls would slow in 2025, when actually falls restarted this year a little.

There are no successful forecasters

Lamdin's not an exception. This is all normal.

Indeed, when I have investigated forecasts in the past, normally more forecasters do better by pure chance, so 8/10 getting it so completely wrong makes 2024 a relatively bad year.

The trend is not a forecaster's friend

Furthermore, forecasters basing their prognostications on recent past trends didn't have a hope.

My assessment of databases of prices going back to the 1950s completely debunked the theory, often quoted in newspapers by journalists and experts, that you can see what will happen in the future based on the trend over the past month, three months or 12 months.

My research easily ascertained that this is simply completely false: recent past results do not help you see future results in any way.

There's no discernible pattern in the data whatsoever, other than the broader patterns that prices just tend to rise most years and they tend to rise over time.

“But I know someone who's pretty good!”

If you think you know someone who gets it right more than the rest, I assure you it's not thanks to any forecasting ability and their “success” is not useful to you in any way.

The “most accurate” forecasters will suggest a low to mid-single digit increase in property prices every single year, because in most years property prices go up – so most years they'll get the direction right at least.

And, generally speaking, price increases average out somewhere in that range, so by default you get the best forecasting record with this simple technique.

Yet these forecasters still get it wrong exactly at all the times that people most need you to be right: be it when property prices rose much faster, when they fell, or, perhaps worst of all, when they plummeted.

How can we use the information that forecasting has been debunked?

A property journalist for a major newspaper once demonstrated that forecasts were pointless and acknowledged that forecasts were therefore not a good tool to use when making any property-related decisions. Good, that first conclusion was logical and incontrovertible.

He then went painfully wrong trying to decide how to be even more helpful to his readers. In a complete reversal, he then wrote something like: “But forecasts are all we've got, so we have to use them, and so here are the latest forecasts…”

Perhaps next time my one-year-old relative tries to have a drink by scooping up liquid in a little sieve, I'll tell her “But it's all you've got, so you have to use it.”

Or maybe I won't, which will force her to again look for other ways to drink orange juice out of a teapot.

I would suggest that we, too, are also forced to find other ways to make property-related decisions. Ways that don't touch short-term forecasts with a celestial bargepole. That's the best way to use the information that forecasting is bunkum.

So tools have we got instead?

Well, I already mentioned two other useful nuggets: that prices tend to rise most years and they tend to rise over time.

This has happened so consistently and for so long that we can certainly use those general patterns. Especially as no Government is likely to finally start building enough housing to overtake demand.

These patterns are useful for property buyers to know, as it means you know you can safely buy when you're sure that your financial and personal situation is such that you'd be willing and able to hold onto that property for many years to come, thereby riding out any blips.

Yet it's not as useful for you to know those nuggets if instead you're lending to property owners for just a year or two. Because what happens to you in a sudden, big crash, and borrowers become less able to repay your loans as a result? You need other tools – tools that work. That's where I suggest you could turn your attention to.

How are you prepared for property crashes when lending?

It's boringly simple and yet the following steps are far more effective than reacting to any forecast.

Largely, you do this by either focusing on the highest quality borrowers, the lowest-risk types of property loans (such as residential buy-to-let), or by having very good loans-to-value (aka “LTV”, meaning the amount of the loan compared to the property's valuation). In this way, you have fewer loans that will lead to losses and the losses that do happen are more contained.

It's also about training yourself to have the confidence not to panic sell at cut prices, particularly when the economy or property market starts going through a really bad patch or you start to finding more borrowers having difficulties.

It's about lending when you are willing and able to hold onto all your loans until they're repaid, without selling them early.

Plus, it's about spreading your money across a lot of loans and of course by spreading into other kinds of investments too.

In an absolutely extreme, hyper-rare event, where even all of those strategies aren't quite sufficient across your entire portfolio of loans, it's also about being ready to lend for more years by re-lending through the bad times to make up for any worse-performing loans the next time.

It's about ensuring that you have a large margin of safety against disasters. (That's how our 4thWay PLUS Ratings work too: by assuming – not forecasting – that very bad things will happen soon and demanding a decent enough return to compensate for that.)

So it's really simple stuff. It might not be inspirational to say “it's about the LTV”, but this is far easier and far more successful than making large buy-or-sell bets based on the entrails of birds.

One last but very important thing

Risk number one in The 13 Key Peer-To-Peer Lending Risks is your own psychology. And it's number one for a reason. It's number one above bad debts. Above fraud. Above incompetence. Everything.

Investing is for the most part not hugely complicated and even the maths is usually pretty easy. Where people normally go wrong can be traced back to what happens in our own heads.

With attempting to forecast the future, this flawed belief in our predictive power comes from a strength that humans have: a strength that goes wrong and misguides us.

That strength is pattern recognition.

It's human nature to see patterns around us and learn from them. It does us an awful lot of good in our lives that we can spot patterns so well.

In finance, however, this great ability we have to see patterns sends us completely astray, because the economy is brutally complicated.

Reading this page today, perhaps you have nodded along about the forecasts, having logically understood every word, and found yourself agreeing it's not rational to use them.

But I've been in the wider world of finance a very long time now and I can tell you that many of the nodders are likely to still find the patterns of the recent past irresistible.

You'll still see the recent trends and you'll not be able to stop the wiring in your brains from quickly extrapolating patterns to the future, even though you know logically today that not a single expert or layperson has demonstrated a reliable record for this.

In other words, you'll behave as if you consider yourself to be the exception that can spot patterns reliably when no-one else can.

And you'll make decisions based on your own pattern recognition, your own forecast.

You'll revert to being the one-year-old drinking orange juice from a sieve (again).

So all I want to do before finishing up is warn against this one more time: and hope that this last additional warning prevents at least a couple more nodders from doing this.

You have plenty of useful tools for decision making in lending and investing, so use those instead.

Further reading

90%+ Loss Shows Difference Between Property Investing And Property Lending.

Pages linked to above

The 13 Key Peer-To-Peer Lending Risks.