The Trouble with Forecasting House Prices

Complex and complicated, but the outlook is poor

September 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • House price growth is based on supply & demand imbalances or speculation
  • Residential property prices can be flat or declining for decades in real terms
  • The long-term outlook for house prices is poor for most countries


Mortgage rates have doubled and tripled in some countries since 2021. So why aren’t residential real estate markets more distressed?

For example, the average home price-to-income ratio in the United Kingdom is at an astounding 9x. This implies that most borrowers are spending more of their income on interest and amortization payments than ever before. The typical UK mortgage is five years, but the interest rate for a new loan has increased from 1.8% a year ago to 4.6% today. Many borrowers will not be able to refinance at this level and will be forced to default. The bank will then sell the home, putting more downward pressure on the housing market.

Yet property markets continue to surprise. Many, including this author, thought that UK homes were already overpriced at an average home price-to-income ratio of 6x over the last decade. Then these homes became even more expensive. Perhaps governments will step in and support borrowers as the political pressure rises. Or maybe inflation will cool, and central banks will lower interest rates.

Since many variables influence housing prices, assessing residential real estate as an asset class is a complicated endeavor. So what are the key drivers of the sector, what are some of the common misperceptions, and what is the long-term outlook?


Residential real estate prices are influenced by either fundamental supply and demand imbalances or simple speculation. The former is easy to understand: When demand outstrips supply, prices tend to appreciate. Supply could be constrained by natural population growth, immigration, urbanization, regulation, or some combination thereof. The trends tend to differ from countryside to city and even within cities, which makes it difficult to gain a clear picture of the true state of the housing markets.

Differentiating between nominal and real post-inflation returns is critical when evaluating real estate investments.