How useful are consumer and real estate brokerage manager forecasts of housing prices in South Korea? A directional analysis

Abstract

Using a newly developed market timing test, we evaluate the directional accuracy of consumers’ forecasts of housing price inflation based on the Bank of Korea’s South Korean consumer survey and real estate brokerage managers’ forecasts from the Kookmin Bank’s survey data. Our directional analysis results show that Korean real estate brokerage managers’ forecasts and consumers’ forecasts are not useful predictors of housing price inflation during the whole sample period. The results of the directional analysis are the same, even though the sample period was split into subperiods. Our results shed light on the redundancies of consumers’ and real estate brokerage managers’ forecasts in formulating government housing policies for housing price stability. Our findings have policy implications for policymakers. First, although Korean consumers’ and real estate brokerage managers’ forecasts are not useful in making correct predictions about the direction of housing price inflation, those forecasts should be considered as those forecasts can cause consumers’ irrational house buying herding behavior. Next, to stabilize housing price inflation within the policy target range, it may be necessary to control households’ expectations about the future direction of housing prices as it can mitigate their irrational house buying herding behavior. Further, we show the advantage of the new market-timing test and how its test results are robust for serial correlation in time-series forecasts and the corresponding actual outcomes. Relying solely on the market timing tests used in the literature, except for the new test, would lead us to conclude that Korean real-estate brokerage managers’ forecasts are useful.