With the S&P 500 up 16.2% and the FTSE 100 up 10.2 in the last 6 months, the focus for investors has recently be back on the stock markets, but can it last?
Houses are one asset class that’s bigger than stocks and bonds combined. The world’s homes are worth over $200trn (£159trn) in total, and they are a very important element in the worlds economy.
The Woodford Equity Income Fund suspension fiasco is perhaps a sobering reminder that the stock market is no easy option, even for the experts, so property provides a continuing safe haven for most of us. However, there’s always the threat of a downturn in property prices.
The last time house prices had a big fall, around the rich world, it triggered the deepest downturn since the 1929 Great Depression, in what has since become known as the Great Recession. But according to The Economist, prices are likely to keep on rising, at least in the short run.
It’s over ten years since the Great Recession, and home values on average are back above water – they’ve recouped all of their losses and then some in most countries in the west, and in some cases they are well above – Canada and New Zealand are now 40% above their pre-crisis peaks.
But is another economic crash due soon? Not according to The Economist,
The Economist has developed an economic model to predict “changes in real home values at the national level,” arguing that “an inexact forecast provides more insight than no forecast at all.”
The model takes into account such measures as GDP growth and interest rates, home prices to rents and incomes ratios and historical prices, all to take into account momentum and mean reversion. Using a machine-learning algorithm they call a “random forest”, the model creates a “forest” of “decision trees”, measuring each of the variables.
Back-testing has shown the model to have an acceptable accuracy of 3 percentage points over an 18 month forecast period, with greater errors during booms and busts, but still of some utility.
Ireland, Spain, Germany and the US are expected to be the fastest growing markets to Q2, 2020 (all above 3% growth) with France, the UK, and Australia showing marginal growth, and Italy declining.
According The Economist’s model, conditions today are dissimilar to those of 2006. Across the ten countries monitored, the “average of its median estimates for the year to June 2020 is an appreciation of 2.3%.”
Although a downturn is not completely ruled out – there is a one-in-seven chance that Italian prices will fall by at least 5% – the most likely scenario, it says, is that the house price rally has further to run.