02/07/2019

As safe as houses

Ranking topics: House prices

Investors focus on shares and bonds, but one asset class is bigger than the two combined. Put together, the world’s homes are worth over $200trn. House prices are crucial harbingers of economic trends: the last time they fell across the rich world, it set off the deepest downturn in decades. 

Ten years have passed since the Great Recession, and home values have made back most of their losses. In Canada and New Zealand they are 40% above the pre-crisis peak. Does another crash loom?

None of the main international institutions, such as the IMF or OECD, includes residential property in its standard battery of economic forecasts. However, The Economist has kept a database of house prices for decades, using figures from the OECD and national agencies. As a result, we have designed a model to predict changes in real home values at the national level. On average, its forecasts with 18 months’ lead time came within three percentage points of actual yearly price changes.

According to our model, conditions today are not similar to those of 2006. Across ten countries, the average of its median estimates for the year to June 2020 is an appreciation of 2.3%. The model does not rule out a downturn: there is a one-in-seven chance that Italian prices will fall by at least 5%. But the most likely scenario is that the rally has room left to run. 

This extract is from our Graphic details blog