Housing slide predicted to be short-lived?

CoreLogic-Moody Analytics latest Home Value Index Forecast says that the strength of the economy will push up Australian home prices soon (The Australian Financial Review, 22 June 2018).

Don’t count on it!

“Employment is growing around 3.1 percent year-on-year, which is comfortably above its 1.9 per cent long-term trend” the report says.

Not any more!  The annual growth to May 2018 was actually 2.5% and slowing rapidly.  Over the six months to May, the annualised growth rate was 1.5%.  Over the four months to May, the annualised growth rate was 0.8%.

Wages growth is barely keeping up with inflation.  Consumer spending growth is anaemic.  How are people going to be able to push home prices up if their incomes are stagnant?

Interest rates are accommodative, but mortgage interest rates can only go up from here due to rising global interest rates.

There are also two demographic factors which suggest that demand growth will slow in the next few years.

None of this is to say that there will be a crash in house prices.  But the house price boom is well and truly over for some time.

My updated analysis will be available in late July.

Charlie Nelson

 

Australia’s Bureau of Meteorology needs a new model

On May 8th 2018 the Bureau’s forecast for cumulative rainfall in Melbourne over the following five days was between 35mm and 144mm. The actual received was 39mm. This was, of course, within that wide band but towards the lower end. The mean of the range was 89.5mm so on that basis, the forecast error was quite large. That may have been disappointing for farmers but a relief for emergency services planners. The largest forecast error for any of those days was for the Friday: the forecast was for 25 to 80, but only 8.4 was received.

It would be helpful for planners to have a probability distribution. For example, was the upper limit of the five day forecast (144mm) a one in 100 chance or a one in ten chance?

This forecasting error might be understandable if it was an isolated incident. Melbourne is a difficult location to forecast due to high variability. But this was not an isolated incident.

Only a few months earlier, in December 2017, an unprecedented rainfall event was predicted but did not materialise. In January 2015, another such prediction was made and did not materialise.

These seem to be systematic failures rather than random errors, suggesting that the Bureaus models are not sensitive to an important driving force.

What is that driving force? Find out in my book “Forecasting: the essential skills”. It describes these incidents in more detail and contains my suggestion as to what the Factor X is. The book also reviews forecasting skill in economic forecasting and political forecasting as well as weather and climate forecasting.

Charlie Nelson

 

Australia’s population growth may be about to slow

Australia’s population growth (to September 2017) is growing at 1.67% per year, which is considerably higher than the rate in the early noughties (1.2%).  The growth rate may be about to slow.

Births have increased from just under 250,000 per year in the early noughties to a peak of 311,000 in 2016.  The number of births has declined only slightly since then but are unlikely to increase in the short-term.  Fertility rates peak at the age groups 25 to 29 and 30 to 34.  The fertility rates in these age groups have declined to a record low since 2008.  This may be due to a decline in housing affordability.  Furthermore, the growth rate of the population aged 25 to 34 is slowing due to a plunge in the number of births in the 1990’s – following the last recession in Australia.

Meanwhile, the number of deaths has been increasing steadily and reached 159,000 in 2016, up from 129,000 in 2001.

The result of these changing numbers of births and deaths means that natural population increase (births minus deaths) peaked in 160,300 in 2013 and has been declining since.  This is expected to continue.  Currently, natural population increase is adding 0.6% to the population each year.

Net migration is currently rising, reaching an expected 258,000 in 2017.  There is a cyclical component to net migration, which hit a record high of 316,000 in 2008.

Permanent migration is declining slightly at present due to more stringent vetting.

Temporary resident visas represent the major component of net migration and this is the cyclical component, averaging over 100,000 per year and peaking at 200,000 in 2008.  Many of these visas are for students.

The next downturn in the number of temporary visas may coincide with lower permanent migration and slowing natural increase.  If this happens, Australia’s population growth rate could decline to around 1.4% or even less.

UPDATE:  Clear signs of the slowing population growth rate evident now.  See my report.  3 July 2018

Charlie Nelson

 

An early federal election for Australia

It seems likely that Malcolm Turnbull will call an early election for August 2018. While losing 30 Newspolls in a row, the gap is not large and could easily be closed. In fact, the recent Fairfax IPSOS Poll has the two party preferred vote close to even – depending on how preferences are allocated.

The Turnbull government has made it clear that there will be personal tax cuts in the May 2018 budget. This will make some voters more happy and will tend to boost the economy. Employment growth has been very strong, but seems to be weakening (growth has been temporarily boosted by the National Disability Insurance Scheme rollout). A tax cut fillip may just extend the good employment news for another few months. Good old Keynesian fiscal stimulus

Today Malcolm Turnbull announced $5 billion to build the airport to city rail link we have been waiting for these last 50 years. The funding has to be matched by the Victorian State government who face the polls in November 2018. How can they refuse?

Today there are reports that Malcolm has asked the party machine to have all pre-selections finalised soon.

The timing of the federal election is constrained by the timing of state elections in Victoria (November 2018) and New South Wales (March 2019) and by the need to have a half Senate election within the next 12 months.

Prime Ministers tend to call elections when they expect the economic news to be best and that will probably be in August 2018.

On the subject of political opinion polls, they are becoming less accurate. See my article in my book Forecasting: the essential skills.

Charlie Nelson

A recurrent pattern of errors by economic forecasters

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This sequence of optimistic economic forecasts was discussed in the New Scientist magazine in 1992 (“Why the chancellor is always wrong”, 31 October 1992).

All these years later, these sequences of economic forecasting errors are still happening.  It is a case of the tail trying to wag the dog!

More examples in “Forecasting: the essential skills” a book aimed at improving forecasting accuracy.

 



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Charlie Nelson