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The Inaccuracy Of Property Price Forecasts

Last month, Halifax forecast 8% falls in property prices to come in 2023, taking prices back to April 2021 levels.

Nationwide also logged a fourth month in a row of price falls in December.

Let me put this bluntly: all of that is of no use whatsoever in making your lending and investing decisions.

There are no reliable forecasters

I used to keep a database of dozens of popular forecasters on the property market, gold prices, oil prices, the stock market, interest rates, and more. This database stretched over two decades.

What I found was that not even one forecaster was even close to being consistent. Everyone of them was deeply unreliable. Even when they guessed the direction right, they would typically be out by a long margin.

As the irreverent economist J. K. Galbraith once said: “The only function of economic forecasting is to make astrology look respectable.”

There's just one rational thing for lenders and investors to do, therefore: completely ignore all short-term forecasts. Put them out of your mind, and don't let them influence your strategy or decisions.

The alternative – trying to make use of forecasts and forecasters despite the fact they are extraordinarily bad at it – is not just illogical, but absurd.

What about following trends?

I didn't just keep databases of forecasts, but I analysed Land Registry and other property data going back to the 1950s. I was looking to see if trends in the direction of property prices was helpful in seeing future prices.

Here's what I found:

  • The direction of the property market in the past month is no indicator of the direction it will take over the next year.
  • Same goes when looking at the past two months.
  • Same goes when looking at the past three months.
  • Same goes when looking at the past year.

In short, the past does not predict the future. Not at all. No pattern whatsoever. Completely random future results ensued.

You get a lot of articles saying what is “happening” to property prices. But that's actually what has happened. Not what's going on now. It is in the past. Don't forget that. Don't project ongoing, short-term patterns that don't exist in the chaos of the economy and property markets.

Again, the only rational thing for lenders and investors to do, therefore, is to completely ignore recent trends. Put them right out of your mind.

Set your strategy without it.

What's the alternative to using trends and forecasts?

If you can't use trends and you can't use forecasts, what else can you do?

The trick for most people is to always invest or lend with a large margin of safety.

In buying your own home, the margin of safety comes from being convinced that you have a safe income, and that you would be happy and able to stay in the same property for many years to come, if need be. You lock in a mortgage rate you can afford for many years and you'll ride out any price falls – even if they happen immediately after your purchase. Naturally, a larger deposit helps, too.

In money lending, the margin of safety means you assume that a major recession and property crash is always about to begin – regardless of what forecasters are saying.

To that end, you lend only where the risk-reward balance is so good that you can still expect to do well throughout, and in the aftermath of, that hypothetical downturn.

If you want some very strong ideas where to begin, read my colleague's piece: The 5 Most Property Crash-Resistant P2P Lending Accounts.

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