Forecasting the Housing Market

I've talked about risk previously, in a post about shock absorbant lamp posts. Whilst I appreciate the intention of government attempts to remove risk from our lives, I fear that in doing so you merely disrupt people's ability to gage it for themselves.

Faith's house is now up for sale, and such a gamble requires as much understanding of risk as possible. The soaring UK housing market has people remembering the tech bubble, and wondering if lessons were learnt. Will it crash?

Firstly, the question isn't "will the housing market slow down?" because it will. We have enough economic knowledge to know that the current growth rates are unsustainable. The important question is when will it peak, and how will it end.

Economist Robert Shiller is famous for predicting the dot.com crash, and uncovering the frailties of the boom. However he was advising to pull out long before the crash, and forefitting a lot of expansion. Michael Walters lost his job at the Daily Fascist Mail for not tipping shares during the boom, because he anticipated the crash too early. Of course people remember losses, but not "imaginary gains I'd have made if I'd stayed in the market longer".

So its tough to judge - economists can't agree when the market will fall, or how. We can improve our estimations by looking at key indicators, for example interest rates. With cheap access to capital, (via low interest rates) and a "bricks and morter" reaction to the tech crash, house prices have largely been inflated by people buying second homes to let. This is why rents are so low at the moment. Interest rates have gone up recently, and the more they do so the less profitable these investments are, making it more of an incentive to sell up. Other indicators of a crash might be DIY TV shows - the speight of property programmes are a direct consequence of the housing boom, and might emerge as a useful indicator. There's also an element of "cabbie wisdom" - i'd imagine odd job men have a better gage of the market than an economist.

So we know it will end, but we're not sure when. How will it end? Here, I'd claim 'self-fulfilling prophecy' - if people expect a crash, as soon as prices dip they'll put theirs up on the market to cash in, and in doing so produce a crash. If people are more confident of houses holding value, then they will. This is the importance of economics education. And the importance of exposure to risk.

Dare I forecast? I think it's the right time to sell.

Note: I apologise if you'd expect a more substantial exploration, but the intention is to discuss underlying notions of risk and bubbles, rather than a detailed survey of the UK housing market.

Comments

[SL]

Speaking of forecast, check this out:

Andrew Harrington, analyst at Salomon Brothers Hong Kong, told the South China Morning Post [ten years ago] that Orange had entered the wrong market and was over-ambitious. Lead investor Hutchison would not see a return on its money, he forecast.

Other observers predicted that with more than 2m subscribers already, the UK mobile market was saturated.

Orange now has 13.6m active customers in the UK and 49m worldwide.