The art and science of housing market forecasts

Gazing into the crystal ball and forecasting where a housing market is headed is not an easy task.

While certain economic fundamentals, such as GDP growth, employment, and immigration, are pillars of predicting the future, forecasters can be blindsided by unexpected events turning everything upside down.

The rise of the pandemic in March 2020 was a perfect example of that and the volatility it created.

“Forecasting, for the most part, is a combination of both art and science. The artistic component involves the creativity and judgment utilized when choosing between alternative forecasting methods, whereas the scientific element refers to the standardized practices that must be followed, depending on the chosen method, if one wants to produce forecasts that are both reasonable and robust in terms of adhering to established theoretical underpinnings,” says the Canadian Real Estate Association in a statement.

 

“Increased complexity doesn’t necessarily guarantee more accurate forecast results”

 

“While it can be appealing on the surface to gravitate towards more complex methods of forecasting, the reality is that increased complexity doesn’t necessarily guarantee more accurate forecast results. As such, CREA’s general approach to forecasting the Canadian housing market is guided by the principle of simplicity, particularly with regards to our overall methodology and model selection criteria.”

Ann-Marie Lurie, chief economist with the Calgary Real Estate Board, who each year delivers her annual forecast at the beginning of a new year, says one of the key things she looks at is demographics.

“I want to see what population expectations are at various age ranges. I’m going to be looking at employment (and) overall economic conditions. Obviously, interest rates are really important too. And wages. All of those things go in there in terms of our expectations,” she says.

“When you have more stable conditions, usually the forecasting is a lot better . . . When I look back, usually directionally, we’ve been pretty good. Sometimes the magnitude is a little bit of a different story. But generally, directionally, we’ve been pretty accurate on that aspect. I don’t think any forecast is perfect by any means. I think with COVID, a lot of things were unexpected, so they kind of threw off a lot of forecasts.”

She says different markets have different things that could impact a forecast during a year. For example, in Alberta, a sudden change in oil prices, either way, has a profound impact on the housing market in the province.

 

Supply and demand have been the biggest indicator of market success… or not

 

Christopher Alexander, President of RE/MAX Canada, says forecasting can be difficult.

“You’re basically doing guesswork based (on) as much data as you can compile,” he says. “The thing to remember is that markets are volatile whether it’s real estate or otherwise, and there’s a number of factors that can come in unforeseen, unannounced, on a whim, however you want to put it. That changes the dynamics, and it can stop markets on a dime.

“If you’re making a prediction, most of the time, you’re doing it on a status quo assumption. It’s essentially anybody’s guess.”

Alexander says RE/MAX has been “very fortunate and pretty darn accurate” with its predictions. He adds that the real estate company is constantly talking to its brokers and agents in different markets in addition to compiling data.

“We’re talking to people on the front lines and on the street,” he says. “That always gives us a big leg up over just looking at data because data really the best you can get is like 30 days ago, and so much can change so quickly, and when it comes to real estate specifically, consumer confidence plays such a huge role. And you can really only get a gauge of that by talking to people on the frontlines who are working with buyers and sellers in real-time to be able to get an accurate depiction of what people are feeling as far as their confidence levels.”

Supply and demand have been the biggest indicator of market success or not in Canada for the past decade, adds Alexander.

 

2022 predictions vs. 2022 reality

 

In December 2021, CREA released its forecast for the Canadian MLS market predicting total sales of 610,695 for 2022 and down 8.6 per cent from 2021. It forecasted the average sale price to be $739,495, up 7.6 per cent.

In its most recent release of data for the Canadian market, CREA said MLS sales year-to-date until the end of October were 581,952, down 23.2 per cent from the same period a year ago, and the average sale price was up 4.3 per cent to $683,016.

In December 2021, RE/MAX forecasted the national average residential sale price to rise by 9.2 per cent in 2022, while Royal LePage forecasted growth of 10.5 per cent in prices.

CREA says its forecasting procedure can be broken down into two stages.

The first step is preliminary research which involves conducting an environmental scan in order to take stock of recent socioeconomic developments. These developments include but are not limited to government housing policy announcements, financial market conditions, interest rate decisions by the Bank of Canada, the current state of the labour market, overall economic performance, immigration trends, population growth and demographic shifts, among others.

Occasionally, this step also involves some amount of stakeholder consultation whereby CREA’s economists speak with different industry players such as policymakers, realtors, as well as other outside economists from various organizations in order to exchange information and gather insights from these individuals regarding their outlook for the housing market.

The second step is data collection and model deployment, which involves collecting data and developing/deploying an econometric forecasting model to produce home sales and average price forecasts.

Anticipating and incorporating external shocks

“The main model inputs include provincial-level data on population, employment, household income, GDP, and mortgage interest rate data. Additional housing-related information such as housing starts, completions, home listings, and housing inventory is also included as model inputs. The average price and home sales forecasts are generated using a Vector Error Correction econometric model (VECM) that was developed in-house,” says CREA.

As many remain curious about what 2023 will bring — CREA notes the difficulty in anticipating and incorporating the impact of external shocks to the housing market and the broader economy into its forecasting model – such as foreseeing and quantifying the impact of the pandemic.

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