There is a huge amount of historical data available on property these days. House prices, rent rates, interest rates, macroeconomic data, microeconomic data and other financial data that all could be relevant. So what data is relevant and what is not? What is the best way to find out where the hottest suburbs are?

At Residex we examine the history of the market to find relationships between it and other economi variables. We then extrapolate the relationships we’ve found into the future to generate our predictions.

When predicting individual suburbs however, this approach is impractical. For instance there are over 600 suburbs in Sydney and to analyse them in detail would be far too time-consuming. We need a quicker, easier method that still produces accurate results.

What key piece of data is best at predicting the future?

Analysis has shown us that the most successful piece of information in predicting the growth in the housing market is not interest rates, or population changes, or number of dwellings constructed or any other intuitive predictor of house price movements.

The best predictor is simply the historical trends in the market. For our quick and easy predictions in reports like our Top 100 Predictions Reports we therefore use only the historical trends in the housing market for that particular suburb.

How do we use historical trends to predict the future?

We look for patterns in the historical house price index and extrapolate those patterns in the future. In particular, we use the idea of the housing cycle to make our future predictions.

What is a cycle?

A cycle is simply a series that repeats regularly. If the housing market grew by 2% one year, 5% the next, 30% the next and -10% the next before repeating exactly then this would be a four year cycle and prediction of the housing cycle could not be easier. One would simply have to find where we are in the cycle and then read off the next growth rate.

Another way of thinking about the cycle is to notice that over a period of four years the housing market has always increaded by 15.67%. Prediction from this point of view is also easy. You simply calculate how much the housing market grew over the last three years and then determine what rate of growth is needed over the next year to bring the four year growth rate up to its overall rate of 15.67%.

This latter way of looking at a cycle is the key to our quick and easy predictive method. While, cenceptually, this is simple, real world difficulties intrude to make things slightly more difficult. Firsty, and most significantly, there’s no such thingg as a perfect cycle in the real world. The housing market is not going to precisely double every eight years.

The best we can hope for is that it will more or less double over the eight years. That is, that it will grow by 100% plus or minus some small error factor. The smaller this error factor, the closer we are to a perfect cycle, and the closer we are to perfect predictions. Conversely, as the error factor gets bigger, the further we deviate from the perfect cycle and the less accurate our predictions become.

The other factor to conider is the length of the cycle we use to predict. While for example Sydney has an eight year cycle, what if the current market we are looking at has an eight and a half year cycle, or a seven year cycle or a two year cycle?

We evade this problem quite simply, by considering all possible cycles to get a large number of predictions and then average these predictions together to get an overall prediction.

When we average the predictions we give greater weight to those that were derived from cycles with small error factors (because these predictions are more likely to be correct), and little weight to those cycles with large error factors.

The over result is our prediction for the housing market.

Nobody can predict the housing market perfectly. However, using this quick and easy predictive methodology we can easily determine predictoins for every suburb in a city. We do this each quarter to derive a list of 100 suburbs that we expect to gave the highers capital growth over the next 5 to 8 years.

The projections are where we expect each suburb to be in the future, all other things being equal. However, and this a critical point, all other things are not going to be equal. Some suburbs will have advantages over others that they never had historically, be it new developments or demographic shifts or any of a vast number of things that cannot be allowed for by the statistical analysis.

The projections provided have a possibility for error implicity attached to them. By this we mean, that the future growth of a particular suburb will be close the projections, but it may be a little higher or a little lower. Detailed knowledge of the suburb will be able to tell you which it is more likely to be.

The Top 100 lists we provide are a good starting point for determining which suburb will grow the most in the future, covering all cities and major regional areas objectively. However, it is a starting point, not an end point. Combining our statistical projections with local, detailed knowledge of the individual markets should provide the best chances of determining which suburbs will perform in the future.

As always, one should remember that there are no guarantees when predicting the future. Using our quick and easy predictor, we can obtain reasonably accurate guides to what we expect each and every surburb to do, based on the historical trends and timing of the market.

The mechanically derived results are best augmented by a level of human intervention taking into consideration local knowledge and awareness of external factors that analysis of the raw historical numbers can’t possibly allow for. With a combination of the human and the computer you have the best chance of locating those suburbs that offer the best prospects for future growth.

Written By John Edwards.

This article is contributed by InvestorsDirect with the aim to help you become more knowledgeable in Property Investment. Visit their website for more detailed information

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