The black swan effect and the impact on Australian property forecasting

Abstract

PurposeThe term “Black Swan” has gained recent popularity to describe an extraordinary event that causes extensive damage. The combination of low predictability and major impact makes an upswing in the magnitude of Black Swan events an important factor when making property market forecasts. The difficulty is that the preferred property forecast models traditionally depend on input data constructed on a normal (bell curve) conditions. As outliers, Black Swan events appear not to form part of the property forecast process. The aim of this research is to examine Black Swan events.Design/methodology/approachThis research examines Black Swan events and tests their impact on the accuracy of short term, six month bi‐annual survey forecasts from leading economists and property analysts for key Australian property market determinants: economic activity (GDP), ten year bonds and CBD office vacancy rates for the 2005‐2011 period.FindingsA range of statistical tests showed inconsistencies with the expert forecasts to actual performance and importantly all the experts appeared to miss the start of the Global Financial Crisis in the December 2008 period. The variations in the margin of forecast error suggest that the experts examine the selected property determinants independently. Also, for economic activity and CBD office vacancy rates, there is an interesting trend that in several consecutive time periods, a simple naïve “no change” forecast was better than those of the experts.Originality/valueIn an environment of increasing occurrence of Black Swan events, this inability to forecast short term property market determinants with confidence highlights serious issues with the current approach to forecasting property market performance. The first step for research in this area is to understand and frame the property risks associated with Black Swan events.