There are several house price indices in the UK that each use a number of different methods to measure average house prices on a monthly basis, which can create a great deal of confusion.
They use different samples, taking data at different stages of the home buying process. Some weight according to mix and season while others do not. This is combined with the fact that house prices are by nature difficult to measure, as the properties themselves are so varied.
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The most important fact to remember is that it is the overall picture of the market which is most valid, rather than a single indices reporting a 1 per cent drop in the rate of growth, or a £1,000 increase in the price of the average home.
Great indicator
The Rightmove index is a great indicator of what is about to happen in the market, as it measures asking prices rather than sale prices, so therefore is the first to detect price changes. The sample size is quite large, as Rightmove claims to list around 50 per cent of all homes for sale. However, it does not reflect the prices at which properties actually sell.
Nationwide and Halifax on the other hand, base their surveys on the sale price agreed by their mortgage customers. While they do cover the whole of the UK, they do not take into account cash purchases, as they are only aware of house purchases which have required a mortgage. Both indices are seasonally adjusted, which means they tweak the data to take into account buying trends at different times of the year, including greater activity during the Summer and lower activity in January. This gives a clearer picture of the overall trend in the prices. Both Halifax and Nationwide also ‘mix-adjust’ their data to reflect the different house types in the mix, for example, one-bed apartments through to large family houses.
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Other indices
The Communities and Local Government (CLG) has its own index, which uses mortgage data from about 50 lenders, through the Council of Mortgage Lenders. While it has the advantage of a considerably larger sample than Halifax or Nationwide, the CLG index is issued two months in arrears, so by the time this information comes out most commentators have moved on to the latest news from more immediate sources to find out how the market is performing.
The Financial Times index uses the Land Registry’s data, which records all property sales in England and Wales including cash purchases, combined with a statistical model to account for transactions not reported to the Land Registry from Halifax, Nationwide and the CLG.
Meanwhile, the Royal Institution of Chartered Surveyors (RICS) uses a completely different method to the other indices, by carrying out a confidence survey of its 300 surveyors across England and Wales, to find out whether they think prices are rising or falling. RICS, rather like Rightmove, can also be a reliable early indicator of a change in the housing market trend.
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An illiquid asset
We believe that individual monthly movements in the different indices from specific providers should not be taken as an indication of the market. Property is an illiquid asset and such minor monthly fluctuations for individual indices are not directly attributable to the sentiment of buyers, but rather more a sample of data used in that particular month. Therefore, there would be an inherent likelihood of it misrepresenting the market as a whole in a single month time frame.
By taking 12-monthly house price growth data from all transactional indices and averaging them, it is possible to gather a more accurate picture of how the market as a whole is performing and the direction in which it is heading, by averaging out short-term ‘noise’ in individual indices.
Upwards pressure
The severe shortage of the supply of homes in the UK will ensure that upwards pressure on prices continues, and this will only ease if the Barker Review is successful in delivering a dramatic increase in new homes – a move that is unlikely to happen in the short term.
However, we may be starting to see the beginning of stabilisation in the actual rate of growth. Buyers’ optimism shown in the Rightmove index may well have overshot, and I feel that the most likely outcome is a reduction in the rate of growth in the coming months, rather than the other indices gaining more. This is a positive sign, as prices should not rise more than the 7-10 per cent per annum for the next three years for the market to remain stable.
The average annual rate of growth taken from Halifax, Nationwide, The Financial Times, CLG and Rightmove was 10.6 per cent in May, down from 11.2 per cent in April. The average price of a home was £209,039 – up from £208,430 in April.
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