Forecasting Residential Rents: The Case of Auckland, New Zealand

Abstract

A large number of studies have examined the price dynamics of housing markets and the comparative forecasting ability of alternative methodological frameworks. However, there has been relatively little work that focuses on forecasting residential rents. This paper uses two alternative methodological frameworks to forecast residential rents in Auckland, New Zealand from the early 1990’s onwards; namely a fundamental variable based Ordinary Least Squares (OLS) model and a univariate Auto Regressive Integrated Moving Average (ARIMA) approach. The results indicate that the simple ARIMA is superior in forecasting residential rents. This suggests that the fundamental variable specification may be useful in estimating turning points in rental movements, but that the simple autoregressive framework is more accurate in predicting rent levels. This is thought to be due to the heterogeneous profile of residential investors and key behavioural issues, such as myopic expectations surrounding returns that surround small-scale non-institutional investors dominating the residential rental market.