How much is your house really worth?

House prices have always been something of a fixation among the British public. After all, unlike our European counterparts, the majority of us - 70%, according to the Council of Mortgage Lenders (CML) - are homeowners. But now that house prices are falling, the spotlight has swung round to focus on how they are calculated in the first place - and what your home is really worth.

There are around 10 different house price indices and their sources range from mortgage lenders to websites and the Land Registry. The problem for homeowners is that each index tells a different story.

In April 2008, for example, Rightmove was reporting average prices of £239,521, while Nationwide claimed the average UK property was worth just £178,555. And while Nationwide was claiming that house prices were down 1% over the last year, the Land Registry was reporting that prices were still up 3.6% over the same period.

The reason for this is that each index is calculated in a different way. For example, Nationwide and Halifax, both being mortgage lenders, take an average of property valuations at the point at which a mortgage offer is made. They include homes from across the UK in the figures, which are adjusted to factor in the season of the year and filter out ‘micro-markets’, such as the higher proportion of multimillion-pound homes sold in London, that could skew the overall picture.

But, even though they use the same criteria, the two lenders do not always achieve the same results. In December 2007, for example, Nationwide reported a fall in the average house price of 0.5%, while Halifax figures charted a rise of 1.3%. Martin Ellis, chief economist at Halifax, says that is down to the fact that “no pattern occurs in a smooth, straight line”. That may be so, but it still leaves the average homeowner scratching their head.

The house price index compiled by the Land Registry is considered more accurate because it refers to the amount in pounds that the property actually sold for and not to an initial lender valuation. But the index only considers homes sold in England and Wales, so the staggering 50% rises seen in some parts of Northern Ireland at the back end of last year, for example, are not accounted for. Also, as they’re based on completions, Land Registry figures are some months old by the time they are published, so do not provide an accurate snapshot of the ‘here-and-now’ market.

Other indices work differently. Online house price index Hometrack, for example, refers to buyers’ offers made on property, while the Rightmove house price index refers to asking prices. Figures from the government’s Communities and Local Government (CLG) department are based on completions, using data from 60 mortgage lenders. But, again, by the time the figures are published they are usually some months old.

Even if you have the time and inclination to compare all the indices, more cynical consumers may note that it’s in the interests of some indices providers to present a positive picture. For example, Rightmove focuses on asking prices as it can then legitimately report house price rises of 0.8% for March.

Making the move

However, in today’s market, asking prices are neither here nor there. Just ask Anthea and Jamie Cook from Rode Heath, Cheshire. Last year, the couple decided they wanted to move to Manchester with their two young sons, to be nearer their families. They put their three-bed, converted 19th-century farmhouse on the market for £450,000 in April. “Other three-bed terraces in the area were going for £500,000 at the time, so we were probably below the benchmark. But we wanted a quick move,” says Anthea, 37.

But one year on and their home has not shifted, despite getting plenty of exposure by local agents, Beresford Adams, and being featured on the Rightmove website. The Cooks even dropped the price by £25,000 to £425,000 last November, following their agent’s advice.

“We’ve had several offers, but we can’t take them seriously as some have come from people who have not even put their own home on the market yet,” says Anthea. “There are seemingly no buyers for their properties because people who would normally be on the lower rung of the property ladder are now increasingly choosing to rent or live with their parents instead.

"This is having a knock-on effect on the top end, which is especially frustrating for us as we can move out into another rented home we own immediately.”

The Cooks’ first-hand experience that people are choosing to stay put is backed up by the latest figures from the National Association of Estate Agents (NAEA). These show that a typical estate agent in the UK had 249 house-hunters on their books in March, down from 385 in March 2007. And in the same month, the average agent only sold seven properties - half the number they were selling the same time last year.

Even valuations made by estate agents or mortgage lenders are of little use as a benchmark, according to Charles Smailes, former president of NAEA. “I had a client tell me recently that his house was worth £500,000 because he had ‘had a valuation’. I replied that I had some of my shares valued just yesterday and they were £12 each, but it says nothing about what they’re worth now.”

Your house, of course, is only worth what somebody is prepared to spend on it.

The Royal Institution of Chartered Surveyors (RICS) is one place you may find some reliability. Its monthly housing market survey does not chart average house prices, but is based on the real-time, ‘on-the-ground’ experience of its members. Stephen Thornton, RICS spokesperson, says: “It’s an excellent indicator of what’s going on in the housing market.”

Gloomy outlook

The RICS report for March, for example, was pretty gloomy, with 78.5% of chartered surveyors reporting falling house prices, compared to 65.7% in February. This is the eighth consecutive fall and figures are now the lowest they have been since the survey began in 1978.

Records of auctions are more telling still, according to Smailes, who is also an auctioneer. “In March I sold 60% of stock at auction one week at the reserve price, which is pretty healthy. But turmoil in the US money markets in the following week meant a colleague of mine sold just 22 properties out of 105. Confidence is fragile and situations change daily. For example, no one ever thought that a bank like Northern Rock could run out of money or that a handful of individuals could interfere with the HBOS share price.”

Jonathan Davis, chartered financial planner and spokesperson for the ominously entitled, agrees: "House price indices have to be taken with a pinch of salt. Sellers should be using the wider economy as a reference."

Property prices soared by around 200% over the past 10 years, according to Nationwide, while the rates of interest charged on mortgages remained super-low. This allowed many people to trade up to bigger properties, taking on bigger mortgages. Although the big borrowing has not diminished, the credit crunch has meant the number of mortgage products and opportunities to borrow have, making it more difficult for homeowners to trade up or refinance the loan on their existing property.

Meanwhile, at 5%, the Bank of England base rate is now 1.5 percentage points higher than it was when rates bottomed out during the summer of 2003, and the three-month LIBOR - the rate at which banks lend to each other and on which mortgages prices are based – is now at 6.75%.

The result is a "Mexican stand-off" between buyers and sellers, says Davis. "If buyers can’t get mortgages, then sellers can’t get sales. Never mind what the indices say, if you intend to sell your home in the coming months, you need to market it at 10% lower than comparable properties in your road. Otherwise, you’ll have to wait a while."

If the Cook’s family home doesn’t sell for what they consider is a bargain price of £425,000, this is just what they intend to do. Anthea and Jamie recently spent £30,000 on a total refit for the kitchen, and since they bought the house 10 years ago for £200,000, they’ve added a conservatory and a shower room and modernised an outbuilding which can be used for offices.

“We’re adamant that we won’t lower the price any further,” says Anthea. “It’s a beautiful house, so we’ll stay put and feel lucky to live here in the meantime.”

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