Chat with us, powered by LiveChatMarket forecasting is a tricky business

Market forecasting is a tricky business

Forecasting housing markets is a complex exercise. How will values change over the year, will first home buyer numbers rise or fall, are rents heading up, down or sideways?

To predict where the market is heading implies you are also predicting a range of economic, demographic and consumption factors such as interest rate movements, inflation rates, population growth rates, labour markets, dwelling construction and consumer sentiment.

This is tricky at the best of times; in today's uncertain times forecasting market conditions becomes even more difficult.

Take interest rates, for example. They have a large bearing on housing market sentiment and buyer demand. It was only a month ago that most economists were continuing to predict a further cut to the cash rate; now the consensus is pointing to a stable cash rate for a while.

Similarly, most economists were expecting the unemployment rate to rise in January yet the rate fell to just 5.1 per cent, indicating a labour force close to capacity.

Besides this, some of the best indicators about the direction of the housing market can be found in the property data itself.

Auction clearance rates are one of the timeliest indicators of housing market sentiment, particularly in the major auction markets of Melbourne and Sydney. About 30 per cent of all Melbourne houses and units are taken to auction (as opposed to private treaty sales); that's the highest proportion of any capital city.

The last week of February showed Melbourne's clearance rate at 63 per cent; the highest rate of successful auctions since October 2010 and the first time cleared auctions were higher than 60 per cent since March last year.

Focusing on private treaty sales, the typical Melbourne house is now taking 70 days on average to sell, compared with just 56 days at the same time last year. Similarly, vendors are discounting their initial asking prices by 7.3 per cent, compared with 5.6 per cent at the same time last year.

Despite the weaker indicators now from a year ago, both indicators have remained fairly level over the past six months, suggesting the housing market isn't likely to see any sort of big decline in values in the foreseeable future.

Transaction volumes in Melbourne over calendar 2011 were about 17 per cent lower than they were in 2010; another clear indication that market conditions are weak.

But once again, transaction volumes are holding reasonably steady at this lower level rather than continuing a downwards trend. The number of homes for sale remains much higher than is usual for a time when transaction volumes are low.

This is going to be one of the biggest blockages to an improvement in market conditions.

So what does the year ahead hold for the Melbourne market? The answer is that, if we see interest rates and the rate of unemployment remaining low and consumer confidence continues to improve, the local housing market should move towards stability.

Source: The Age Domain - written by Tim Lawless is research director with property data company RP Data.