Why house price forecasts are dangerous

Forecasting is not just a bit of fun, it has serious destructive effects on a household's wealth.

Savills, the property services provider, has released another property forecast for 2012 and beyond. It's now forecasting a fall of 2% next year.

Shortly before 2010 started it forecast a 5.5% rise for 2012. You might say that clearly it now thinks this earlier forecast was completely wrong, although it has not put it that way itself. It has failed to mention it at all, in fact.

It has also conveniently failed to mention its previous record. I could pick on just about any forecaster, not just Savills, but since the real-estate company has provided our most recent prediction, let's look how its annual estimates have performed in recent history, by consulting my own database of hundreds of forecasts from dozens of professional and amateur forecasters:

• In November 2008, Savills forecast a fall of 11% in 2009. Prices rose 6%.
• Despite that, in November 2009, Savills forecast a remarkably precise fall of 6.6% in 2010. Prices went up a fraction.
• In November 2010, Savills forecast around 3% falls for 2011. So far it's not on track, with prices up in the ten months to October. Savills requires achievable but large falls over the next two months for its prediction to be realised.

I used Nationwide's data for actual price changes, since its house-price index is the one most forecasting economists seem to prefer as standard, in my experience. Maybe Savills could squeeze better results from another index, but it doesn't look good for the property advisors.

The motivation for forecasting

The main reason we make self-assured forecasts is probably an innocent one. We're hard-wired to see patterns. Unfortunately, you can find all sorts of economic motifs looking back at the past few months or years, but those never seem to prove useful in predicting what will happen next.

Forecasting is also an easy way to get your company cheap publicity. Make a confident prediction and back it up with a few clear arguments and you'll get a good spot in all the national papers. Repeat in 6-12 months, brushing your last guess under the carpet.

We also, all of us, have lots of subconscious biases. You can see them at work every day. You'll read single-minded vitriol against a celebrity, because the columnist, who's never met her, is convinced she's lying about cheating on her boyfriend. You can also see it in a good number of readers' comments underneath articles, where you'll find good discussion and opposing ideas are confronted with rage and dismissiveness.

Forecasters want to believe they can accurately predict the future. They presumably close their minds to their previous records, and everyone else's. We all shut out things that don't suit our interests, beliefs or pride. We can only try to reduce subconscious bias by questioning our beliefs and ideologies. We won't always succeed but, the more we do, the richer our lives will be.

Forecasts have real impacts on our wealth

As entertaining as forecasts can be, it isn't all just a bit of fun. Professional forecasts have real impacts on people, who use them to make financial decisions.

There are those way back who saw the ominous pattern of entrails being convincingly laid out for them, who then waited for years and years for a crash, paying ever increasing rents, when they could be halfway through paying off their mortgages by now.

Then there are those who sell up when they shouldn't, with the backing of a few rational-sounding arguments and best hunches from a handful of firms who have appealed to and strengthened the readers' biases. Finally, there are those who buy when they shouldn't, all because of a barrage of erroneous predictions.

Making rational financial decisions

Forecasting is not harmless voodoo. There are victims. Lots of them. The unsatisfactory truth is that you can't rely on forecasts and that they may even bite you very badly. Buy or sell a few years too soon or too late and it can cost you tens of thousands of pounds over the course of your life.

Some people write glibly that forecasts are rubbish, but what the heck we've got no other way to make financial decisions, so let's use them anyway.

I think we can do better than that. I have written about a rational way to decide when to buy your home. It is also useful to think beyond this to other financial decisions. I looked for rational ways to choose a mortgage, for example, and there are simple ways to pick a savings account that cut out forecasting whether variable- or fixed-rate deals, or long or short ones, will turn out better.

My forecast

It's common for forecasters, be they professionals or readers commenting in the box below, to “amend”, “update” or - my personal favourite - “vary” their forecasts. One of the most common defences for these about-turns is “We were right, but the timing was off,” as if timeframes are not important to the wealth of property buyers, owners and sellers.

In its recent forecast, Savills acknowledged inflation's relationship to house prices. It said that house prices will be 6% higher in 2016, but that real prices will be 11% down. (Read about inflation in What are “real” prices?)

So my forecast is that, if house prices continue to rise with no big fall in the next few years, some of those who predicted falls will start saying “Ah, yes, but after adjusting for inflation, prices have fallen. That's what I meant all along. Ahem.” As if real falls and non-real (called “nominal”) falls are exactly the same, whereas in reality they have very different effects on homeowners, home sellers, hopeful first-time buyers, and others.

By the way, I'm not predicting prices will continue to rise over the next few years – I have no idea what will happen whatsoever. My forecast is just that, if they do rise, plenty of people's subconscious biases will lead them to cranking out excuses, and that real prices will be the main get-out.

How do you think those who are predicting no crash will “vary” their positions if prices fall significantly from here? Answers below please.

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