House price indices: are they of any use?
As a nation, we're curious when it comes to property. Whether you're looking for your first home, wanting to upgrade or downsize, or fancy becoming a landlord, we all need to know how much money's going to be involved.
There are now at least seven well-publicised house price indices. In general, they try to measure the appreciation or depreciation of a given group of properties, usually across countries, and over a set period.
They are concerned with how prices have changed from one period to the next, not absolute figures. Yet many of us treat them as such.
Selwyn Lim, managing director of house price website Mouseprice, says: "One house is very different to the next. So measuring change is very tricky. If they were all the same you could easily use average monthly prices to work out what the market is doing. The problem is that simple monthly averages don't take account of all the differences such as the property's location, size or type of building."
Each index has its limitations. For example, the Land Registry house price index is the most comprehensive as it has the figures for all completed home sales in England and Wales because buyers and sellers are legally obliged to submit the information.
However, the index is calculated using those properties sold in the month for which a prior price is available. So if a home last sold before the start of the Land Registry's data in 1995, it won't be included in the data making up the index figure.
Typically, such properties will be family houses that don't change hands as quickly as flats so the index omits data on lots of ‘average homes'.
Meanwhile, the Nationwide index - frequently cited by the media, along with the Halifax index - is based on mortgage approvals and believed to cover just 10% of the UK mortgage market.
As cash buyers account for around 40% of the total transactions, of which there were 64,000 in January 2012 according to HM Revenue & Customs, the Nationwide figures could be based on as few as 3,800 mortgages, or thereabouts. As there are 2,500 parishes in the UK, that's an average of less than two homes in each one. So can the data really be robust?
"The best index is the one that has the best data. From a statistician's perspective, the best data means the biggest sample size. In this respect, Land Registry has a huge advantage," according to Lim.
PROOF YOU CAN'T RELY ON THE INDICES ALONE
In a single month, the average UK house price stated by these five indices differed by £67,460, and the annual change reported ranged from a fall of 0.6% to a rise of 7%.
|Index||Average price||Monthly change||Annual change||Based on...|
|Acadametrics||£223,965||0.2%||7%||Land Registry house price data.
Includes cash purchases
|Halifax||£162,307||-3.6%||-0.6%||Mortgage approvals at the post-survey
|Land Registry||£166,153||-0.2%||5.3%||All sale completions in England and
Wales for which prior sale price is
|Nationwide||£166,757||0%||3.1%||Mortgage approvals at the post-survey
The problem for anyone keeping an eye on the indices is that the average prices and price changes reported often contradict each other. For instance, in December 2011, the Land Registry put the average house price at £160,384, a yearly decrease of 1.3%. The Nationwide claimed the average price was £163,822 but reported an annual increase of 1%.
And singing off a completely different hymn sheet, property website Rightmove's index, based on asking prices recorded by 90% of UK estate agents, claimed the average price was £225,766 – a whopping difference of nearly 41% compared to the Land Registry's average, and an annual increase of 1.5%.
Of course, the reason why the figures are so different is to do with the fact that they measure slightly different things. And while the monthly figures can be somewhat erratic, they do tend to converge over the longer term. But it's no surprise the indices are criticised for at best confusing consumers, and at worst for misleading them.
INTERPRETING THE DATA
Professor Gwilym Pryce, a housing expert at the University of Glasgow, says that the real issue for consumers regarding house price indices is that "people tend to look at headline figures from the house price indices and assume they apply to their type of property and their area but, of course, this might not be the case".
A house price index is merely an indicator of wider market conditions. But the information provided by the indices can and should form an important part of your background research.
For example, you can use a local index, such as that from the Land Registry, as a rough guide to how the price of a property you may wish to buy has changed since the last time it sold – websites such as Mouseprice can give you historic selling prices for your area.
Say you're looking at a three-bedroom semi in the outskirts of Bristol that sold for £150,000 in 2010, and the indices largely converge to suggest a fall of 2% in the South West region over 2011, you could reasonably assume that it might be put back on the market during the second quarter of 2012 at an asking price of £147,000 - assuming no money had been spent on improving it.
Of course, much more detailed local market research will be required to obtain a realistic asking price but indices can be useful to buyers as an information source to tap into before approaching an estate agent.
The Financial Times' Lex Column likens pitting house prices reported by the different indices against each other to comparing apples with pears (see table above). And property expert Henry Pryor, who buys houses for the rich and famous, goes as far to say: "No individual index provides more than a barometer of the health of the market, which can change from parish to parish.
"Some are more helpful than others but only a fool would rely on them when it came to buying or selling their most valuable asset."
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