FOOL'S EYE VIEW
The Perfect House Price Index

By Jane Mack (TMFJane)
July 20, 2004

According to the latest survey, rising interest rates and recent warnings from the Bank of England about the state of housing market are finally beginning to put the brakes on house prices. The Royal Institution of Chartered Surveyors says that average house price inflation was at its slowest for ten months with small price falls recorded in London and the South East.

Blah, blah, blah! Do you ever ask yourself how useful all these surveys and house price indices are? Admittedly, when they're all singing from the same hymn sheet, you do at least get a rough idea of trends, but there are so many surveys and indices these days, it's hard to know which one is the most reliable. Which one should you pay attention to?

Land Registry

The good thing about this particular index is that it is based on plain and simple fact. Every single property sale in England and Wales has to be recorded at the Land Registry along with the sale price. So, when it comes up with an average house price, it stems from merely adding up the total value of the transactions and dividing by the total number of houses sold. However, since no two houses are the same, your 'average' is going to include the value of the tiniest studio flat and that £70 million mansion that recently sold in London.

The main problem with this index is that it is only published quarterly so, while you can see where house prices were going three months previously, it's not exactly timely. For example, their most recent report covers January - March of this year and it was published at the beginning of May. We've had two interest rate rises since March and market sentiment has clearly changed since then.

ODPM Survey

Launched last year, this is the government's official monthly survey of house prices (it comes from the Office of the Deputy Prime Minister). The data is collected from around 50 mortgage lenders and is based on completion prices.

However, it is based only on house purchases involving mortgages - cash purchases are not included even though they account for around 25% of the market. Also, when it comes to evaluating the 'average' house price, the figures are 'mix adjusted' - a rather peculiar computerised method of, effectively, merging the details of 5-bedroomed detached houses with one-bedroomed flats in order to come up with a 'typical' house.

The reason for using this more complicated method of averaging house prices is because certain types of homes may sell better in one month and not the next. In theory, it means you don't get a false impression of what house prices are really doing from month to month - in practice, a 'typical' house price tends to reflect a median price rather than the average price.

Nationwide and Halifax

These are probably the best-known indices and they're published monthly by two of the UK's largest mortgage lenders. The information is based on the approval stage of a mortgage application which may not be quite the same as the final purchase price. And, since they only survey their own customers, it may not be representative of the market as a whole. (If Madonna required a mortgage, would she go direct to the Halifax, or to someone like Savills Private Finance?) Cash purchases also, obviously, don't come into the equation.

Like the ODPM index, their figures are 'mix adjusted' and are 'seasonally-adjusted' too. The most popular buying times tend to be spring and summer so prices tend to be slightly higher at those times of the year because there's more demand. You, therefore, couldn't directly compare prices in April with those of the previous December - they'd be distorted purely because of the time of year.

However, although both indices produce fairly similar results, they differ slightly in the methodology they use. For example, Nationwide excludes properties valued at more than £1 million whereas Halifax doesn't.

National Association of Estate Agents, Hometrack and Rightmove

When it comes to information provided by estate agents, again you cannot compare like with like.

Rightmove's index is based on the asking prices of properties advertised on their website. They claim their figures represent about half of all properties on the market at any one time and that, by using asking prices, it acts as an indicator of where prices are going rather than what's happened in the past. Asking prices are not the same as selling prices though.

Hometrack and the NAEA base their indices on surveys of various estate agents around the country and the reported average sale prices that have been agreed. Again, the agreed price of a house may not be the same as the amount of money that changes hands when completion day finally arrives.

Royal Institution of Chartered Surveyors

Members of RICS are an unusual band of people in that they not only check out your home for signs of damp, dry rot and for valuation purposes, but they can also be estate agents too.

The RICS survey is not an index of house prices, as such, but is based on the general confidence levels of their estate agent members - it isn't intended to come up average house price movements. They may be asked whether they 'feel' house prices are going up or down and whether the number of buyers and sellers seems to be rising or falling, but they won't come up with an 'average house price'.

The key with any kind of housing survey or house price index is not to try and compare them with each other. You simply can't because they all use different methodologies and, therefore, have different strengths and weaknesses. You'll have realised by now that there is no perfect house price index so the best you can do is to pick the one whose methodology you feel is the most timely and realistic and stick with it. Just remember, past performance is not always an indication of the future!

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