Forecasting Housing Approvals in Australia: Do Forecasters Herd?

Abstract

Price trends in housing markets may reflect herding of market participants. A natural question is whether such herding, to the extent that it occurred, reflects herding in forecasts of professional forecasters. Using more than 6,000 forecasts of housing approvals for Australia, we did not find evidence of forecaster herding. On the contrary, forecasters anti-herd and, thereby, tend to intentionally scatter their forecasts around the consensus forecast. The extent of anti-herding seems to vary over time. We also found that more pronounced anti-herding leads to less accurate forecasts.

House Price Forecasts, Forecaster Herding, and the Recent Crisis

“…Using this test ensures that our results can be readily compared with results reported recently by Pierdzioch et al [10,11]. The test is easy to implement, the economic interpretation of the test results is straightforward, and the test is robust to various types of specification errors.…”

“…Cross-sectional dispersion of forecasts of, for example, exchange rates has been widely documented in recent literature (see, for example [19]). Pierdzioch et al [10,11] have documented cross-sectional dispersion of forecasts of housing starts and housing approvals. To the best of our knowledge, the cross-sectional dispersion of forecasts of changes in house prices has not been documented in earlier literature.…”

“…The WSJ survey data contain, for different forecast horizons, forecasts of a large group of individual forecasters, allowing forecaster interactions (herding and anti-herding) to be analyzed at the micro level. We go beyond the research by Pierdzioch et al [10,11] in that our data set also contains forecasts of changes in house prices, whereas they have studied only housing starts and housing approvals. While housing starts and housing approvals summarize the stance and prospect of housing markets, house prices are more important in terms of, for example, balance-sheet effects.…”

“…Only in recent research Pierdzioch et al [10,11] have studied herding behavior of professional housing market forecasters. Following their analysis, we implemented a robust empirical test developed by Bernhardt et al [2] to study whether professional housing market forecasters did, in fact, herd.…”