What are the best leading indicators for real estate? (Part 2)

In our last article, we discussed some of the challenges unique to real estate forecasting, defined what a lead indicator is, and explained two broad types of lead indicators. In this article, we’re looking at a few examples of the two types:

Directional Indicators

1. Economic Performance and Interest Rates

When a local economy is thriving, it sets the stage for heightened demand in the real estate market. Economic prosperity means increased job opportunities, higher consumer confidence, and healthy inflation levels – eventually translating into greater property demand.

In tandem, interest rates impact the real estate landscape by controlling borrowing costs. Low interest rates create an environment conducive to property investment, as borrowing becomes more affordable. It’s also crucial to consider the monetary policy lag – the delay between changes in interest rates and their visible effects on the property market. This lag is why interest rates act as such an important lead indicator. The precise mechanics of monetary policy lag go beyond the scope of this article, but it’s safe to assume that interest rate changes will always take some time before they’re reflected in the market.

2. Population and Demographic Trends

As 2023 taught us, the flow of people within a region profoundly shapes housing demand and, consequently, the trajectory of real estate markets. Growing populations signify an increasing demand for homes and properties, triggering an upward trend in the real estate sector. The influx of residents not only influences residential housing but also fuels demand for commercial spaces. Conversely, demographic trends indicating a declining or stagnant population may signal a potential downturn in the real estate market. Furthermore, immigration forecasts published by governments tend to be reliable, meaning we can get some idea of population trends ahead of time. Understanding these dynamics is always essential for anticipating market movements and making informed decisions.

You may notice that these examples of directional lead indicators are more macro in nature, as well as being not specific to real estate. While this sort of ‘blunt-er’ information is more useful for identify large scale trends – direction – it can of course tell us a bit about strength when looked at within a retrospective context.

Strength Indicators

1. Transaction Volume

High transaction volumes typically suggest a lively market with buoyant buying and selling activities, reinforcing the notion of a robust and dynamic real estate environment. However, it’s crucial to recognise that elevated transaction volumes can also occur in markets that are experiencing a downturn. In challenging times, increased transactions may stem from factors like distressed sales or investors capitalising on market fluctuations. Thus, while high transaction volumes often signify a flourishing market, this can be illusory. Greater property transaction volumes could be indicative of a high number of distressed sales, potentially a bad sign for future performance.

2. Price Momentum

Price momentum serves as a practical lead indicator in real estate, offering insights into both growth and decline. Positive momentum, evidenced by a consistent and accelerating upward trend in property prices, can be taken as evidence of ongoing market growth. Conversely, negative momentum, characterized by a sustained decline in property values, serves as an early indicator of a continuing downturn.

Importantly, momentum should be taken with a grain of salt. We’ve all heard the line on TV – “past performance is not indicative of future results” – which makes an important point! But thanks to buyer psychology and other factors, it can be a good idea to consider rolling averages or other measures of momentum alongside the other information available to you. Particularly for property, momentum is often a useful gauge of the degree to which price trajectory will maintain a level of resistance to change.

Mixed Indicators

As we’ve alluded to, we can often infer something about strength from directional indicators, and vice versa. However, other indicators can be designed to take both strength and direction into account, equally. The sales to listings ratio is a good example of this. It calculates the balance between properties listed and those sold, providing a snapshot of supply and demand dynamics. A ratio above 50% (more sales than new listings) signifies a seller’s market, indicating higher demand, while below 50% (more new listings than sales) suggests a buyer’s market with increased supply. Going beyond this, comparing the ratio to its average levels offers insights into future price trends. A ratio above average hints at impending price growth, while below average suggests potential price declines. Mixed indicators similar to this, summarising supply-demand dynamics equally, make for extremely powerful leading indicators of price growth.

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