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I forecast that forecasts will be wrong

It’s the start of the new year and the media is full of predictions about the housing market in 2007. Everyone has a view. If you’re worried about making predictions to clients about the housing market and getting it wrong, fear not – the experts will get it wrong as well.

A quick look at the latest forecasts for house price growth from the great and the good of the housing market shows opinions ranging from just 3.5% to the heady heights of 15%.

• Capital Economics – 3.5%

• Halifax – 4%

• Hometrack – 4%

• Nationwide – 5% to 8%

• RICS and CML – 7%

• Lombard Street Research – 15%

So who’s got it right? As William Goldman famously noted of the movie industry, nobody knows nothing, and the short answer is probably none of them. If you have to take a punt, Capital Economics was recognised by the Sunday Times poll of economic forecasters in 2005 as the best at predicting key economic indicators. Interestingly, David Smith, the Sunday Times’ economics editor who compiled the table, stated that “the clear winner was Capital Economics, which was more downbeat on growth than most”.

Maybe that’s a lesson, although in 2006 Capital Economics rethought its pessimistic view of the housing market.

But a year is a long time and the art of a good forecast is the re-forecast to account for fluctuations that have thrown carefully constructed crystal ball-gazing out of the window. Stamp Duty, inflation, unemployment and supply and demand are all taken into consideration.

And with the Monetary Policy Committee adjudicating over interest rates, oil prices, consumer confidence and retail prices all have to be borne in mind as well as the rate at which house prices advance.

Look at the evidence over the past year – two rate rises totalling 0.50% have done little to dent the appetite for credit. And despite the government’s efforts, housing supply is low. Unemployment is not as bad as the forecasters had predicted.

So house prices are going up. It’s worth taking into account the Treasury’s latest compilation of independent forecasts that suggests the base rate will end 2007 at 5%. If we accept that interest rates have the biggest impact on house prices the picture seems stable.

My prediction – and I don’t claim to be Mystic Dev – is 5% interest rates by the end of 2007 and 5% house price inflation.

When speaking to clients you can only assess what’s most suitable for them from the products available based on market conditions at the time. These appear set to remain stable, which is no bad thing.

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