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Morning Line: Can we believe the house price indices?

The Government is reviewing official house price statistic because it is concerned that the different methods used for calculating house prices may be causing confusion.

 

With house price indices showing different rates of growth or decline, how much notice should we take of them? The Government is reviewing official house price statistics because it is concerned that the different methods used for calculating house prices may be causing confusion.

Meaningless averages?

The Office for National Statistics is investigating the ‘coherence and comparability’ of the two official house price indices – Land Registry figures based on the actual price at which a property is conveyed, and the house price index produced by the Communities & Local Government. The review will then consider house price statistics more broadly to see how useful they are to the public.

Perhaps the more relevant question is – how useful are averages anyway, other than to indicate a trend, when houses within 100 yards of each other can command widely different prices? This is most noticeable in London and other big cities where there are terraces of identical properties. One end of the street may be near a main road while the other end is adjacent to a park. The difference in values could be substantial. Properties on one side of a street can often sell for up to 30% more if there is a railway or motorway running behind the houses on the other side of the road.

What most people do if they are buying or selling is use their commonsense and do their homework. Clearly what house prices are doing nationally is not much use to you if you are looking for a two bedroom flat in Sunningdale. Geographical differences are enormous and national average house prices are even more misleading. Sensible buyers and sellers keep tabs on their local area and the location where they want to buy.

Today, this is relatively easy to do with websites such as Zoopla, Houseprices.co.uk and many more which are based on official Land Registry entries covering all properties conveyed in England and Wales. Just type in a post code and you can find out what your neighbour paid for their home when they bought last year. If a homeowner is seriously considering buying or selling they will also talk to local estate agents to get a feel for the market.

Skewed numbers

Indices produced by lenders such as Halifax and Nationwide do not include the conveyance of unmortgaged properties - a substantial and growing proportion of sales as the population ages and retirees trade down. Whereas the Land Registry figures, although at least six months out of date, include all properties in England and Wales, both mortgaged and unmortgaged – but not Scotland.

In addition, Nationwide regularly produces figures which vary significantly from Halifax’s findings because it has a greater presence proportionately in London and the south east. Meanwhile the Royal Institution of Chartered Surveyors produces a much less scientific survey based on trends reported by local estate agents and surveyors, as does the National Association of Estate Agents, while websites like Rightmove and Hometrack record different data including asking prices which may well be 5% to 10% above prices actually achieved on sale.

Trends

What the indices can do is indicate trends which might be useful. But even this is often misleading. In highly desirable locations – Rock for example in Cornwall, popular with middle class families - properties have retained their value in spite of national statistics showing a decline and desirable ones are selling for more than their 2007 values when nationally the market peaked.

When house prices fall sharply, only homeowners obliged to sell put their homes on the market which produces big distortions in the indices. Much of the recent recovery in prices is down to the fact that so few quality properties were put up for sale and those that were often commanded a premium which inflated averages.

Does the public care?

Most people make their own judgment about what house prices are doing in their area and with some of the indices being ‘seasonally adjusted’ they are about as much good as nothing in telling you what you might sell your house for or what you will have to pay for the property you want to purchase. You are much more likely to get a feel for what is going on in the market by talking to friends at a dinner party than consulting house price indices.

Indeed, the ONS admitted that the review was not a response to problems reported by either of the main government indices, and said that the first stage of its review would focus on how satisfied users were with the two official indices and whether they understood the differences between them. It plans to report back on this stage of the review before the end of the year.

What a waste of time. If the government is looking for cuts – this review looks like a pretty good candidate.

13 comments so far. Why not have your say?

Yvonne Goodwin

Aug 18, 2010 at 11:24

I think the best index to follow is the Land Registry as this reports what has actually happened watch out for 27th August 2010 at 11am everyone !

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Ian

Aug 18, 2010 at 12:44

My experience has been that vendors still ask for silly prices but often sell for a lot less if they need to offload the property. Most of them do not talk about it as no one likes to take less than they want.

Come October when the spending cuts begin to bite there will be many more distressed sellers and some great opportunities for buyers who may get as much as 40% off the asking price. I would recommend buyers who are able to wait to do so until market conditions are more favourable and when it will be possible to grind sellers down.

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Michael Jenkinson

Aug 18, 2010 at 12:56

Well actually the land registry excludes new build, as it uses repeat regression analysis - with the likes of Barratt showing +20% yoy increase in private asp at June 10, that's quite some ommission. The DCLG show all UK mortgage transactions & so omits cash buys. Halifax 'mix adjusts' & resets the housing mix on which it bases its average price to 1983. Nationwide similarly 'mix adjusts' resetting the mix to the way it was 3 years ago. Each model has its flaw - the prices they provide simply need to be understood in context of the timliness of the data & the method used to provide it.

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MC

Aug 18, 2010 at 13:03

How can you complain about the ONS reviewing their indices and methods? This is their job and is a basic tenet of good statistics if only others followed the same good practice.

If there is anyone out their who does not understand that indices only show trends and not the actual price you'd get for selling your particular home then they are beyond help and certainly wouldn't be helped by this article.

At the end of the day Yvonne is right, only one index is wholly reliable and that is the land registry's actual sales figures. But as you have said this still relies on averages and during a period with limited sales there is still scope for wide swings either way based on a few mansion sales or a bank offloading an apartment scheme at auction.

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Anonymous 1 needed this 'off the record'

Aug 18, 2010 at 13:07

I agree with Yvonne the land registry are actuals and therefore most reliable. Funny though now the housing market looks like its turning the figures are now deemed confusiing. They Look fine to me - prices are falling, no confusion there.

What IS confusing is the constant bombardment of housing programs (such as homes under the hammer) from the peak of the property boom (2007-2008) that are constantly on the goggle box (in the morning) . I mean this gives the impression its a good time to buy / invest in property for goodness sakes!

That era is gone. The era of reckless lending (and pass the financial debt timebomb) is over and now comes the wake up call of no "greater fool" to be found to pass overpriced property onto. You gotta ask yourself the question now - why wont banks lend 100% - they dont believe property is worth risking 100% due to more risky market conditions. Therefore why should you or I take that risk?

The ponzi scheme is about to tumble! look at housing in america & ireland - Gordon.B. sold our economic souls down the river to win the election by propping up the house of cards. This only served to fund the suckers rally that has now ground to a halt - although savers are still being robbed blind by pitiful interest rates and deliberate policy to inflate away debts.

And this is before the austerity measures and housing benefit caps impact. Looks like we are in the fear stage now. (see

http://www.moneyweek.com/~/media/MoneyWeek/2009/090914/Import/stages-in-a-bubblegif.ashx).

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Keith Snell

Aug 18, 2010 at 13:08

There is no reason why the Land Registry based information should not include new build sales, neither is it necessary that it is 6 months after the event. It should be modfied accordingly and used as the sole index. Averages are useful guides for many reasons. The remainder of statistics are probably inferior to those pruduced by the RICS

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Stephen M

Aug 18, 2010 at 13:46

Surely the only house price people care about is either their own or the one they want to buy.

Average house prices are a pointless waste of time and should be scrapped.

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JMT

Aug 18, 2010 at 14:12

Land Registry is the only true reflection of what the house prices are doing. The only problem is that its in the past.

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Dislexic Landlord

Aug 18, 2010 at 14:41

I dont think you can trust anything apart from you eyes looking on streets that you want to buy in

THe truth is prices are falling if you use the 3 x income rule this will give you the starting prices that first time buyers can afford

In the North FTB can buy but I think as a ruker of thumb 30% off 2007 prices maybe a little bit more by the end of this year and next and the next

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Dennis .

Aug 18, 2010 at 15:19

House prices are definitely out of kilter, I have two 25 yr old professional sons in good jobs who have no chance of affording to buy a place unless they get a 5 x salary mortgage plus deposit. The only way is down...................

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Peter Thoresen

Aug 18, 2010 at 17:49

At the risk of repeating a comment in another thread, I sold last month and made a decision to sell at about 10% below the price of similar but inferior (smaller unextended) houses being advertised on rightmove. Got a sale within 2 months.

As well as the other houses remaining unsold to date, the estate agents are gradually bringing the prices down. But at the same time a lot more houses are coming onto the market, and the trend is for them to be cheaper (I would say 2005 prices now being asked.) If you want to sell, you have to get ahead of the (downward) curve and bite the bullet. If you don't have to/ want to sell, just sit tight, but don't expect to be back at 2008 prices for about 10 years (with major falls in the next 5 years.)

What everyone has to do is forget what you might have got at the 2008 peak and be realistic about current pricing.

On the question of statistics and average prices, I have seen from the Land Registry figures some major 'silly' price entries where it is obvious that there has been a transaction between relatives at 50% market price. No doubt HM Customs & Excise will catch up with these transactions at some point, but in the meantime they, together with discounts to sitting tenants, help skew the averages downward.

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richard hickman

Aug 18, 2010 at 20:04

The current methods are so skewed they are a waste of effort even reading them. They are as meaningful as the average value of Fruit.

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Lorna Bourke

Aug 19, 2010 at 11:17

Hometrack has made the point that it does not sell houses but is an independent property analytics service which provides information to the housing and mortgage industry and its surveys measure sentiment like the RICS survey. I hope this puts the record straight.

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