Like them or loathe them, there’s no getting away from property market forecasters and prognosticators. But whose property market forecast should you trust?
For some investors, forecasts are crucial when making their investment decisions. They can be helpful in finding the next growth areas and for significantly reducing your research time.
Predictions also give you a sense of certainty which can be helpful in this uncertain world.
Shane Oliver, chief economist at AMP Capital and a frequently quoted forecaster explains that as investors, we look for any kind of surety or guarantee that we’re making the right decision when investing.
“People hate uncertainty and will try to reduce or remove it however they can. And if we don’t have the expertise, the experts must know.” – Shane Oliver, chief economist, AMP Capital
However, there are dangers to relying solely on experts’ forecasts when investing.
Forecasts of doom can make you exceedingly risk averse while expectations of a boom can do the opposite – it can lead to irrational exuberance. Both mindsets are catastrophic when investing no matter what the asset class.
But perhaps even more dangerous for investors is trusting reports that are produced by unreliable sources.
Property Market Insider asked leading forecasters Jeremy Sheppard, research director with Empower Wealth and creator of DSRdata.com.au. and Luke Metcalfe, founder of microburbs.com.au for their insights and insider tips on how to spot the real deal.
Whose property forecast should you trust?
First, let’s get something straight. No matter how famous the person making it, there’s no guarantee the predictions will materialise.
That’s just the harsh reality of the forecasting game.
However, there are people who make predictions on areas to purposely sell a development.
“Many suburb reports are merely developer advertising,” explains Sheppard. “Someone from sales and marketing or even just an office admin person will Google a few topics about a suburb. They pick out all the good things and ignore all the bad and package it together in something that looks professional.”
It’s not easy to see through this kind of BS, it even fools some industry professionals sometimes.
So how do you assess a property forecast or research?
Here’s a checklist of what to look out for.
Is the report independent?
When it comes to assessing a report, there are only two factors that are relevant to investors: risk and return.
Therefore, a quick way to tell if a report is independent is if it addresses those topics in an unbiased objective manner.
“You want to know if the report provider has a vested interest in conclusions you draw from the report,” says Sheppard.
“If there’s a property to be sold at the end of the report, it’s a developer marketing, NOT a research report .”
How experienced are the researchers or writers?
Any report delivered by temporary ad-hoc researchers are less reliable compared to those written by researchers immersed in the property market.
What’s the forecaster’s track record like?
Check the forecaster’s track record. Ask them if they’ve run the model for the previous years and how accurate was it says, Metcalfe.
“If they’ve been around for years, check their forecasts against reality.” – Luke Metcalfe, founder microburbs.com.au
A proven track record would certainly help according to Sheppard. But he points out that track records can easily be manipulated to present a better result than reality.
“A common trick is to pick 10 hotspots and a year later mouth off about the one success and simply don’t mention the nine fails,” explains Sheppard.
“I’ve recently compared half a dozen high profile property investment experts to see who can pick growth locations the best.
I compared the performance of their picks against the national average growth rate as a benchmark for success. None of them had a greater than 50% success rate.” – Jeremy Sheppard, creator, DSRData.com.au
How does the company or researcher make money?
Is the company merely a marketing front for developers or are they genuinely independent researchers?
Some researchers get commissions so it’s in their best interest to write positive things about the area get more people to buy.
Does the research or forecast address supply and demand?
“If the research fails to address supply and demand or tries to include a 3rd or 4th topic in addition to supply and demand, then clearly they’ve missed the point since supply and demand are the ONLY factors affecting price change,” warns Sheppard.
Does the report come with hard and fast numbers?
A research without hard data is often just a subjective opinion which can easily be biased.
“Quite often a boring table of stats might be more help than paragraphs of emotionally charged monologue,” says Sheppard.
How reliable are big data or robo investing?
Big data allows for much wider scans than humans can do explains Metcalfe.
“No one has the time to look at every dwelling in the country. Just as we rely on Google to find web pages because there are too many to navigate ourselves, increasingly, investors will use automated searches to scan for unique opportunities. That is if your goal is to find the best opportunity.”
Sheppard points out that at the moment, the most reliable means of finding growth locations is via a robo investing type of technology where big data algorithms are applied to key growth indicators.
“Artificial intelligence (AI) is already beating the experts. And it is in its infancy.
“However, experts set a low benchmark. So the algorithms didn’t have to work too hard to beat them. The algorithms still have plenty of fails.” – Jeremy Sheppard, DSRData.com.au
“I would suggest investors use the algorithms to shortlist locations and then do your own personal research on that short-list of suburbs. If there is anything peculiar about the data like a vacancy rate of zero when you know there are properties for rent, then strike it off the list.
If there is something peculiar about the suburb like a mining or tourism town, then again, strike it off the list. Eventually, you’ll get down to a suburb with all the statistical evidence to suggest growth, combined with your on-the-ground research to match.”
So, should you rely on a property market forecast when investing?
If your goal is capital growth, you can’t measure success if you don’t have a forecast. However, you need to be pragmatic and realise that it’s difficult because it concerns the future.
Anything can happen.
As Oliver succinctly puts it:
“If forecasting was easy, we would be very rich and sipping champagne in the South France.”