Extrapolative time-series modelling of house prices: a case study from Sydney, Australia

Shanaka Herath, Vince Mangioni, Song Shi and Xin Janet Ge

International Journal of Housing Markets and Analysis, 2023, vol. 17, issue 5, 1157-1175

Abstract: Purpose - House price fluctuations send vital signals to many parts of the economy, and long-term predictions of house prices are of great interest to governments and property developers. Although predictive models based on economic fundamentals are widely used, the common requirement for such studies is that underlying data are stationary. This paper aims to demonstrate the usefulness of alternative filtering methods for forecasting house prices. Design/methodology/approach - We specifically focus on exponential smoothing with trend adjustment and multiplicative decomposition using median house prices for Sydney from Q3 1994 to Q1 2017. The model performance is evaluated using out-of-sample forecasting techniques and a robustness check against secondary data sources. Findings - Multiplicative decomposition outperforms exponential smoothing at forecasting accuracy. The superior decomposition model suggests that seasonal and cyclical components provide important additional information for predicting house prices. The forecasts for 2017–2028 suggest that prices will slowly increase, going past 2016 levels by 2020 in the apartment market and by 2022/2023 in the detached housing market. Research limitations/implications - We demonstrate that filtering models are simple (univariate models that only require historical house prices), easy to implement (with no condition of stationarity) and widely used in financial trading, sports betting and other fields where producing accurate forecasts is more important than explaining the drivers of change. The paper puts forward a case for the inclusion of filtering models within the forecasting toolkit as a useful reference point for comparing forecasts from alternative models. Originality/value - To the best of the authors’ knowledge, this paper undertakes the first systematic comparison of two filtering models for the Sydney housing market.

Keywords: House price; Extrapolative modelling; Decomposition; Exponential smoothing; Sydney (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijhmap:ijhma-02-2023-0018

DOI: 10.1108/IJHMA-02-2023-0018

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