Why do economists get their property market predictions so wrong?

I remember a couple of years ago when American economist Harry Dent spooked a lot of Australians by predicting an economic tsunami that would take property prices back to levels we haven’t seen for over a decade. globe world currency economy money travel

He said our markets would collapse by the middle of last year and of course he was wrong, just as were so many others who predicted hot spots, property bubbles and market collapses.

And much the same happened to all those predictions of property Argmagedon made over the last few years

So if our economists are armed with all the research available in today’s information age, why can’t they agree on where are our property markets are heading?

In fact a better question would be – why do so many get it wrong?

The simple answer is that market movements are far from an exact science.

The fundamentals are easy to monitor.

Things like population growth, supply and demand, employment levels, interest rates, affordability and inflationary pressures.

However one overriding factor that the experts have difficulty quantifying is investor sentiment.

Currently investor sentiment is low while the economic fundamentals are quite solid

I remember reading a great report a few years ago where  Dr Shane Oliver, AMP’s Chief Economist explained that people often suffer lapses of logic when investing and many of their investment decisions are driven by emotion.

For example we tend to extrapolate the present in the future.

When things are booming we think the good times will never end and when the market mood is glum, we have difficulty seeing the light at the end of the tunnel.


Think about it…

When the media reports falling property prices or an impending housing crash, many investors become scared and sit on the sidelines, believing the end of property is nigh and things will never improve, when in reality much of the risk has been removed from the market.

Conversely, when property markets are booming and stories of investors seemingly making large gains overnight abound, people want to jump on the bandwagon and cash in; often at a time when the market is near its peak.

Other emotional traps include becoming overconfident, wishful thinking and ignoring information that conflicts with your current views.

In other words many investors create their own “reality.”

Can you see how this type of activity, influenced by investor psychology, drives booms and busts?

How the dominant investor mentality of the time helps drive the property cycle? 

Simply, when investors put on the brakes, housing values tend to stagnate or fall due to lack of demand.

And when they jump back into the market, demand rises and up go prices.

Obviously one or two misguided investors won’t be able to influence property prices, but investor sentiment is contagious.

People tend to want to do what others are doing – they ‘follow the crowd’ because going against popular opinion is seen as risky.

What if you make a mistake? What if the others are right and you are wrong?

Oliver said this “collective behaviour” is magnified by several things including; 

  • Mass communication enabling the behaviour to become infectious.
    Now more than ever we are bombarded with messages from the media influencing how we think and feel about things.
    When we hear that real estate is doomed, all but a handful of sophisticated investors get scared out of the game.
    And when the media tells us housing markets are booming everyone wants a piece of the action.
  • Pressure to conform. If your friends or family are doing it, it must be right.
    Human nature makes us reluctant to do the opposite of what our peers are doing.real-estate-world-economy-global-markets-companies-tech-travel-health
  • A major precipitating event can give rise to a general belief that motivates investor behaviour.
    The Global Financial Crisis that saw waves of investors scared out of the markets.
    On the other hand the resource boom enticed thousands of investors into west coast housing markets to cash in on the resulting property boom.
  • A general belief that grows and spreads.
    When the belief that property values can only go up spreads through an uneducated new generation of investors they enter the market pushing prices up even further, perpetuating the belief and helping make it a reality! Similarly when the crowd believes the market is going to crash, they steer clear, this gets reported in the media and the negative sentiment feeds on itself.

Oliver observes that these “lapses in logic” by individual investors and the magnification of such lapses by crowd psychology feeds property cycles, and goes a long way in explaining why we see booms and slumps at different points in time.

When investor sentiment is positive, the crowd jumps in feet first, pushes up demand and places upward pressure on prices – causing boom conditions.

Conversely when sentiment is negative, the crowd backs off and frequently sells out of the game due to concerns that they’re about to lose everything – causing market slumps.

What can an investor learn from this?

  1. Our property markets are not only driven by fundamentals, but also by the often irrational and erratic behaviour of an unstable crowd of other investors. While the long-term performance of property is influenced by the fundamentals, its short term performance is much more affected by market sentiment.
  2. Booms never last forever, neither do busts. Don’t be surprised when they come around and don’t overreact. This will help you avoid being sucked into booms and spat out during busts.
  3. Treat your property investments like a business and stick to a proven strategy to take the emotions out of your investment decisions.
  4. Recognise that property is a long term play and set up financial buffers to help you ride the property cycles.

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Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.

Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you?

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  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now! Click here to learn more
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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au

'Why do economists get their property market predictions so wrong?' have 5 comments


    January 14, 2019 Ben Loveday

    If all investors were logical there would be no booms and no busts. It would take all the fun out of it. We’re almost at the point where a computerized algorithm could do it for us, pointing everyone to the same ideal investment. Which could get nasty.



    January 14, 2019 Rosie Maddox

    Thanks Michael for your, as usual, calm and measured perspective. One additional factor, of course, is government intervention. This past year has seen ASIC and APRA impose tighter lending restrictions on banks they regulate, making it harder for both investors and regular home buyers to get mortgages. Then the Banking Royal Commission made banks even more risk averse, squeezing the neck of the lending mechanism even tighter. Perhaps this intervention actually “saved” us from a bubble bursting? We’ll never know. But it is another factor that is virtually impossible to predict, although we can influence it to some degree by the government we vote in every few years.


      Michael Yardney

      January 14, 2019 Michael Yardney

      Your’e right Rosie – every year thanks come out of the blue – an X factor – which messes up our predictions.
      Did APRA stop us from a property bubble or did it create a property downturn that we didn’t really need? Only time will tell.



    March 14, 2014 Bryce

    “Why do economists get their property market predictions so wrong?” Simple – the same reasons you and everyone else does Failure to understand the difference between the value of something and its Price!


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