Our new model is sanguine about rich-world housing markets
ago a housing bust caused the deepest recession in generations. Since then, ultra-low interest rates and an increasing abundance of credit have pushed house prices back towards or beyond their pre-crisis peaks. As a result, in some markets policymakers are beginning to worry that boom could once again turn to bust. The long housing rally in Australia is coming to an abrupt end: prices there fell 8% in the year to the end of March.
Could another crash lurk on the horizon? To estimate this risk, The Economist has created a statistical prediction model for house prices. It uses data on macroeconomic conditions, market fundamentals and historical home values to peer 18 months into the future. As anthis week shows, the model performs well when back-tested against the past. Although it would not have anticipated the magnitude of the extreme boom and bust of the mid-2000s, it would have foreseen a sharp reversal in the trend.
Looking ahead, the model is currently rather sanguine about the likely paths for home values across ten rich world countries, thanks to the persistence of low interest rates and ample credit. The average of its median forecasts for price growth in the year to the end of June 2020 is 2.3%. The model expects prices in Australia to level off rather than continuing to decline. Only in Italy are values more likely to fall than to rise.
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