COMMENT: Back in May I wrote a column questioning Finance Minister Grant Robertson’s recent prediction that house prices will increase by just 0.9% in 2022 suggesting that he was the new Jeane Dixon, a reference to the 1960s American Clairvoyant who supposedly predicted the assassination of John F Kennedy in 1963. In the article I also explained that he based that prediction on Treasury briefing papers which also claimed that house prices will only increase by a little over 2%, each year, until 2025.
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The Treasury claim was extraordinary given that it was so far out of step with the reality of way that the market works and, in subsequent media interviews, I went as far as to suggest that Treasury were simply ‘making the figures up’.
It now turns out that that’s exactly what they were doing.
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Over the past few days we’ve learned that Treasury officials have grudgingly responded to repeated questions by ACT, National and Greens MPs and have revealed that their process for arriving at their forecasts were produced by using a model called Matai, that predicts house price growth based on things like the long-term growth of house prices, the ‘fair value’ of a house, interest rates, and population growth. All good so far, but they then went on to admit that, layered over the top of this modelling was a bit of economic guesswork, which they called ‘a degree of judgment’. They explained that their 0.9% house price growth figure was based on the Government's recent housing market interventions and their ‘assumptions’ about how buyers would respond to that package of measures.
Since they made that admission, all hell has broken loose. Various media organisations have indignantly picked up on the temerity of Treasury for such despicable behaviour and Green MP Chlöe Swarbrick and National MP Nicola Willis are now calling for Treasury officials to ‘answer questions’ with Swarbrick describing the modelling as ‘blatantly opaque, offering no meaningful information and insight’. She wants officials hauled before the Parliamentary Finance committee in person to explain how it works.
Both Swarbrick and Willis are wrong and both are showing their inexperience and a lack of wisdom. That’s understandable, from Swarbrick, who is building her career on the elevation of nonsense – but less so from Willis who has a bit more life experience and, frankly, should know better.
If that view surprises you, I’d invite you to stand back and look at this issue objectively for a moment. That Treasury Officials use a degree of professional judgement in making predictions is entirely reasonable and the shock and horror which has greeted that part of their response to questions from the MPs is perplexing. Economists and commentators are constantly making predictions about what the market will do based on available data, the interpretation of trends, the history of the market and – you guessed it – the exercising of professional or experiential judgement. I do it all the time – in fact it’s the basis of most of my property market predictions over the past 15+ years which, if I may be so bold, have generally been extremely accurate (2020 not withstanding).
Ashley Church: “The people at Treasury don’t have the depth of understanding to be making informed judgements.” Photo / Ted Baghurst
So, our concern with the recent Treasury prediction should not be that it was arrived at through the exercising of professional judgement – but rather, around who actually made the prediction and what professional judgement they were drawing upon. There have been recent criticisms around who Treasury is hiring and suggestions that they’ve stopped hiring mostly economists and, in one case, hired 24 new analysts of whom only four had an economics qualification.
Therein lies the real issue. The people at Treasury (and, for that matter, the Reserve Bank and some of the trading banks) who are making these predictions simply don’t have the depth of understanding of the history and behaviour of the market to actually be making informed judgements which are, well, informed.
But let’s not buy into the simplistic idea being promoted by Swarbrick, Willis and co, that, if we just fed in the right information we could accurately predict what the housing market will do. That’s naïve nonsense and ignores the reality that market predictions can only ever be based on the best information available coupled with the collective experience of people who have watched the behaviour of that market over a long period of time. That generally isn’t true of bright-eyed uni grads who are still enamoured with the untested theories of their lecturers which are still ringing in their ears.
If Treasury and the Reserve Bank want to restore some credibility around their housing market predictions they could do worse than to assemble a panel of experienced market operatives with whom they could consult to test their policy ideas and from whose experience they could regularly draw a more informed consensus.
Whether they will do so remains to be seen.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
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