A Comparative Analysis of the Accuracy and Uncertainty in Real Estate and Macroeconomic Forecasts

Abstract

The importance of forecasts of the macroeconomy is assessed in the context of forecasts of the real estate market in the United Kingdom. We compare and contrast the accuracy and uncertainty in forecasts of rents, and capital and total returns with those for a variety of macroeconomic series. The results show that in general forecasters tend to be marginally more accurate in the case of macroeconomic series than with rents and substantially so in the case of capital and total returns. However, once account is taken of the heightened volatility of the underlying series forecasts, rents do perform comparably. Across all of the series, forecasts tend to be smoothed with forecaster's under-estimating performance during economic booms and vice versa in recessions. We find that rental forecasts in particular are affected by economic uncertainty, as measured by disagreement across the macro-forecasters. Increased uncertainty leads to increased dispersion in the rental forecasts and a reduction in forecast accuracy.