Forecasting Australia's real house price index: A comparison of time series and machine learning methods

We employ 47 different algorithms to forecast Australian log real house prices and growth rates, and compare their ability to produce accurate out‐of‐sample predictions. The algorithms, which are specified in both single‐ and multi‐equation frameworks, consist of traditional time series models, machine learning (ML) procedures, and deep learning neural networks. A method is adopted to compute iterated multistep forecasts from nonlinear ML specifications. While the rankings of forecast accuracy depend on the length of the forecast horizon, as well as on the choice of the dependent variable (log price or growth rate), a few generalizations can be made. For one‐ and two‐quarter‐ahead forecasts we find a large number of algorithms that outperform the random walk with drift benchmark. We also report several such outperformances at longer horizons of four and eight quarters, although these are not statistically significant at any conventional level. Six of the eight top forecasts (4 horizons × 2 dependent variables) are generated by the same algorithm, namely a linear support vector regressor (SVR). The other two highest ranked forecasts are produced as simple mean forecast combinations. Linear autoregressive moving average and vector autoregression models produce accurate olne‐quarter‐ahead predictions, while forecasts generated by deep learning nets rank well across medium and long forecast horizons.