Forecasting is inevitably controversial

…and our work in New Zealand is proving no exception

Forecasting is inevitably controversial because it specifically quantifies assumptions we make about the future, raising questions about the future that can be considered mere opinion. As we in the forecasting game say, “One thing certain about a forecast is that it will be wrong!” But there are distinct benefits in undertaking the process of forecasting because it forces us to question our assumptions and better understand our cities in the process.

The Wellington NZ experience

.id recently completed forecasts for the City of Wellington http://www.idnz.co.nz/forecast/wellington. The results raised a few questions because the figures to 2031 are just below the Statistics New Zealand ‘medium’ series forecasts – and are therefore perceived by some as being conservative. This difference is because .id has assumed overall lower rates of residential development than Stats New Zealand forecast for Wellington over the short and medium term.

Residential development opportunity analysis

.id’s demographic forecast modelling is in many ways similar to methods use by statistics authorities and governments (both in New Zealand and Australia) – modelling births, deaths, migration, household formation etc. http://forecast.idnz.co.nz/Default.aspx?id=366&pg=5420.

There is however an important and significant difference which relates to the methodology .id uses to understand the various forms of land supply at the small area level (eg suburbs). While taking into account regional constraints, .id’s forecasts are largely based on a ‘bottom up’ approach. Effectively what we have provided Wellington City with is not just one forecast, but 31 forecasts – one for each suburb constituting the City. For each suburb, we analyse and quantify the various forms of residential land supply. This includes an assessment of the following:

• major development sites;
• historic levels of infill;
• broad acre sites;
• vacant lots;
• development and redevelopment opportunities in and around commercial centres; and also
• redevelopment opportunities throughout established residential areas.

This is a complex process because we use a different method to analyse each of these forms of residential supply. To add to the complexity, we also take into account a range of economic impacts on land supply and development rates . These factors include an assessment based on land economics; broader economic trends; as well as developing an understanding of the economic role and function of the area and region as a whole.

The ‘questions’ approachWhat have we learnt?

Another way of explaining our approach is that we address the following questions with a view to quantifying the answers in detail:

• How have the historical rates of development been trending? Why?
• Where has development been occurring across the city and how will that change in future?
• What type of residential development has been occurring and how is that likely to change in future?
• Where is land supply likely to run out in future and where is there more opportunity for residential development?
• How is the economics of land supply likely to influence future residential development trends?

What have we learnt?

Undertaking this exercise with the City of Wellington is providing the City researchers and planners with a deeper understanding of their place. The work has revealed some interesting issues that have perhaps challenged commonly held views about where, what type and how much residential development is likely to take place across the City. The forecasting process has revealed some interesting issues, particularly regarding the following:

• Levels of overall demand – There is a trend of lower levels of development compared to recent periods – driven by in part land supply issues and also some macro-economic changes that have had an impact on residential development.
• Competing uses – There is evidence that the role and function of Central Wellington is changing. Recent historical residential development rates have decreased there due to the nature of competing uses in Wellington Central. That is, commercial development has been effectively competing with residential development in the centre.
• Competition for demand within Wellington – Demand for higher density development in and around several designated suburban centres is unlikely to be economically viable until residential greenfield land supply in Wellington has decreased significantly.
• Strong regional competition – Also there is evidence that Porirua and Lower Hutt play a significant role in the regional housing market – effectively taking demand from Wellington.

Forecasters VS Futurists

When undertaking a forecast it is important to be conservative. By this I mean conservative with regard to ensuring that there is an evidence-based narrative that forms the basis of the forecasts. The difference between a forecaster and a futurist is that forecasters are not speculative.

We have been undertaking forecasts at .id for the best part of 14 years and have established a comprehensive process of building assumptions, critical review and update.

The process of preparing forecasts is designed to include a draft review component with the client. It is important that all views on the draft forecasts are expressed during this period to avoid continual updating of forecasts.

There is invariably a diversity of opinion surrounding any set of forecasts that are produced, particularly when comparing with other sets of forecasts in the public domain. At .id our response to this has been to emphasise the detailed assumptions behind our forecasts as well committing to a process of regular forecast reviews that takes place every 18 months.

To ensure that best use of the forecasts by resource allocation decision makers, it is important that there is confidence in the process by which the forecasts were prepared, as well as stability in the currency of the numbers. We have found that the best way to achieve this is to have clear processes for updating forecasts, thereby producing numbers that can be used in reports with confidence that they will not be superseded on an irregular and ad hoc basis.

Our experience has been that specified regular and systematic updating of forecasts provides the best approach for feedback to be provided and assessed. These updates do of course provide the opportunity to assume more (or sometimes less) residential development based on new evidence of development activity.

At .id we are definitely forecasters and not futurists – although we do love speculating about the future of cities and economies (…but only off the record).

(Thanks to .id forecasters Johnny and Richard for much of the material for this blog.)

If you would like to receive more updates about demographic or economic trends, do follow us on twitter @dotid or subscribe to our blog (above). You may also like to visit us at id.com.au