Economist issues warning over property market forecasts

Senior academic at the UNSW Business School Dr Jonathan Reeves has warned that forecasting expected house price changes at the suburb level is particularly difficult when conditions soften off the back of a housing boom, as reflected in recent price falls reported in Sydney and Melbourne.

“Forecasts of the level of risk in the housing market are likely to remain high in the next few years,” Dr Reeves said.

“[Observers] should interpret these forecasts with caution, as they come with huge margin of error when applied to the suburb.”

Dr Reeves urged home owners not to heavily depend on broad housing market forecasts when assessing local risks.

“Citywide, there is typically insufficient data to generate a forecast that has a useful level of accuracy. Whereas, suburb house price risk levels are highly predictable with a lot of data, and with elevated levels of downside risk in house values.”

Further, Dr Reeves noted the factors that are likely to contribute to a sustained risk in the housing market.

“Firstly, house prices are at levels that are not justifiable based on fundamentals such as household income,” the senior academic said.

“Secondly, household and investor debt levels are often excessive.

“Finally, there has been a very high presence of speculative investors in the housing market.”

Dr Reeves also claimed that risks in the Australian housing market over the past few years were  largely ignored.

“High levels of risk were for the most part ignored, as negative returns were few and far between,” Dr Reeves added.

“However, in housing markets, substantial gains can quickly be followed by sharp declines. For example, some Sydney suburbs are recording declines already of more than 20 per cent.”

[Related: Credit crunch continues to spur home price slump]