Here in the UK it is almost impossible to turn on the TV or radio without hearing another statistic on house prices. A news announcer will boldly and confidently state something like “ House prices rose by 1.1% last month” or “House prices fell by 0.4% last month” and most people will just assume that what has been stated is absolute fact and get on with their day. But can we really trust these announcements and do they really paint an accurate picture of the current market ? To answer this question we need to understand where the data is coming from and how it has been compiled.
When a newsreader makes such an announcement, although they often won’t tell you this, they will almost always be referring to the monthly house price data produced by 1 of the five major UK house price indices – Acadametrics, Rightmove, Nationwide, Halifax and the Department of Communities and Local Government (LCG Index) which is based on Land Registry figures.
However the problem is that these 5 indices are increasingly painting a very different and inconsistent picture. For example, in May 2010 the Halifax Index reported that UK House Prices were still 16% below their 2007 peak, yet the average of all the other indices suggested this figure to be 6.7%
So, why the discrepancy ?
The disparity arises as each index is skewed towards different parts of the market.
Halifax and Nationwide, for example, base their figures on their own mortgage approvals. These provide up-to-the-minute data on prices that are initially accepted by vendors, but only cover a very small proportion of the total number of property transactions, excluding unmortgaged transactions and transactions funded by other lenders, completely.
Conversely the Land Registry information includes all sales and is based on completion figures, which show the actual price the property was sold for. These figures lag the market by an average of 15 weeks.
The Rightmove Index, compiled by the online property portal Rightmove, tracks vendor asking prices rather than sold prices.
How accurate are each of the House Prices indeces ?
In all but the most bouyant of markets, actual sold prices do tend to be lower than asking prices so, whilst the large sample set from Rightmove can provide a good early indicator of market trends, the Rightmove index is almost always going to provide an overly optimistic view of prices.
The Halifax and Nationwide might argue that their indices reflect the most recent changes in the market and this is a fair point. However there can be no doubt that their indices are weighted more towards the lower end of the housing market and are more reflective of borrowers taking out larger than average mortgages. This is borne out by the fact that the average price paid by a Nationwide or Halifax borrower is 25% below the national average. Such buyers tend to be less affluent and normally take out higher loan to value mortgages which are subject to higher than average interest rates. To compensate for this these borowers are much more keen to haggle prices down. The result is that house price statisitics based on their data alone present an overly negative view of house prices.
Another issues with the Halifax and Nationwide data in recent years is that they rely on a relatively small sample size, especially during times of low housing transaction volume, the relevance of which can be called in to question. This can often produce wildly varying and volatile data in consecutive months, such as a 0.5% fall in prices followed by a 1.5% rise in prices the following month
The CLG index, is based on actually sales data from the Land Registry so cannot be criticized for accuracy. However, with a delay of around 4 months it does not produce an up-to-date picture of market conditions in a fast changing market.
The most accurate index
Probably the most accurate of the House Price Indices is the one produced for the Financial Times by the consultancy firm, Acadametrics. This is because it incorporates data from of all the other indices to produce it’s own figures. It is initially based on up-to-date mortgage approval figures from Halifax and Nationwide but tailored to include likely Land Registry figures for that month. When the actual Land Registry data is released, the FT figures are changed to reflect them
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