Here's why you shouldn't trust economists to predict property prices

In any crisis there’s always an incoming tide of crystal ball rubbers.

Financial experts produce research, opinions and forecasts on anything that moves. Those of us who have worked in the markets have learned the skill of gathering that all up and forming a “view”.

Some experts are specialists in one asset type or one company. Others are generalists spitting out an opinion on the direction of dollars, euro, sterling and five-year interest rates quicker than you can make a cup of tea.

The one lesson you learn from calling the markets is this. You’ll get it right and wrong so many times, you’ve no idea if your “skill” in this dark art actually exists.

It pays not to keep a tally, to preserve your ego.

Behind every prediction are factors and scenarios where the author believes the exact opposite could occur. They are not paid to sit on the fence and have to make a call on it.

Getting it wrong doesn’t mean they weren’t fully aware there was a strong opposing view.

Here are some common financial fallacies which crop up in every crisis.

1. That economists can predict the property market

It seems to be the bane of an economist’s life; the dreaded media call asking which way the property market will move in a crisis.

Economic fundamentals always make perfect sense. Technically property should go down when jobs are lost and mortgage stress occurs. That may happen in pockets, but there’s many a crisis where people turn to real assets.

Things investors can touch and feel have a psychological advantage.

A lump of gold doesn’t shrink when sharemarkets dive and a bedroom doesn’t fall off the side of a house. The price might move, but the asset still looks the same. Bricks and mortar are the retail equivalent of gold to institutional investors.

Property is driven more by the collective emotion of the population. Within it lie different sub-sets of people. Unemployment may be rising, but if the vast majority still have jobs, their decisions are not reacting to this. Similarly, a large number of debt-free people don’t react to rising debt-stress. Emotional response and circumstance is more individual in the property market than it is in the sharemarket.

2. That property markets can’t go higher in a crisis

It sounds wildly counter-intuitive that we could trade through a pandemic with a flat market or a mini boom. Property prices are holding up and it’s not a Covid-free phenomenon. In the UK the Nationwide price index fell in June. Yet property websites now report buyer inquiries are up 75 per cent and the average asking price is 2.4 per cent higher than pre-lockdown.

Stamp-duty is about to be removed on houses costing less than £500,000 (NZ$960,000), stoking demand.

With massive government injections of cash around the world, we may well see asset price inflation over the next decade in our sharemarkets and property markets. This was a well-documented phenomenon of the 2008 Global Financial Crisis.

3. That recovery curves come in V shapes, U shapes or W shapes

Eventually over time, if you cock your head and squint your eyes at a chart, you can usually see some sort of vague V, U or W shape. The purpose of predicting the shape is to help businesses brace themselves for what lies ahead. The shape forms day-by-day based on new facts, government interventions and consumer reactions. The pivot points don’t reveal themselves until they’re an historical fact. I often wonder if some wag simply turned a Very Unreliable Wobble into an economic recovery theory.

4. That forecasting is a science

Financial experts are in hot demand in times of economic woe. Forecasts are tasty morsels and can even move markets. A master of this dark art will never be pinned to a number and a date in the same breath. It’s media training 101 for crystal ball rubbers. If you said “by Christmas”, never name the amount of movement you expect. Just say up or down. If they’ve nailed you for a number, never ever give them a date with it.

Forecasting is not a science. It contains a heavy dose of gut reaction, the ability to factor in human emotion and the art showing some conviction, while pointing out the risks of an opposing view.

Sir John Templeton, afund manager once referred to as the greatest stock picker of the century said, “a lifetime of investment research has taught me to become more and more humble about making predictions”.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.