Property market modelling and forecasting: simple vs complex models

In: Journal of Property Investment & Finance, Band 33, Heft 4, S. 337-361

Abstract

Purpose– The commercial property market is complex, but the literature suggests that simple models can forecast it. To confirm the claim, the purpose of this paper is to assess a set of models to forecast UK commercial property market.Design/methodology/approach– The employs five modelling techniques, including Autoregressive Integrated Moving Average (ARIMA), ARIMA with a vector of an explanatory variable(s) (ARIMAX), Simple Regression (SR), Multiple Regression, and Vector Autoregression (VAR) to model IPD UK All Property Rents Index. The Bank Rate, Construction Orders, Employment, Expenditure, FTSE AS Index, Gross Domestic Product (GDP), and Inflation are all explanatory variables selected for the research.Findings– The modelling results confirm that increased model complexity does not necessarily yield greater forecasting accuracy. The analysis shows that although the more complex VAR specification is amongst the best fitting models, its accuracy in producing out-of-sample forecasts is poorer than of some less complex specifications. The average Theil'sU-value for VAR model is around 0.65, which is higher than that of less complex SR with Expenditure (0.176) or ARIMAX (3,0,3) with GDP (0.31) as an explanatory variable models.Practical implications– The paper calls analysts to make forecasts more user-friendly, which are easy to use or understand, and for researchers to pay greater attention to the development and improvement of simpler forecasting techniques or simplification of more complex structures.Originality/value– The paper addresses the issue of complexity in modelling commercial property market. It advocates for simplicity in modelling and forecasting.