The media is obsessed with house price indices. But they're misleading and worse than useless when it comes to forecasting house price movements.
One of my (many) bugbears is house price indices. Or, to be more precise, my issue is the media's obsession with every tiny movement that they have.
There are several surveys to choose from these days. Oh for the good old days when we only had to worry about Nationwide and Halifax numbers. Recent years have seen new measures launched by Hometrack, Rightmove, Financial Times and even the government. To add to the confusion, some surveys are purely on averages of others, rather than analysing their own unique data.
They all say different things
It's rare for two surveys to agree with each other. The differences between their figures can be quite significant. This is mostly due to the fact that they all measure house price growth in different ways. Some have regional biases and others ignore purchases made without a mortgage or make seasonal adjustments. As there's no real definitive index, the press comments on all of them as if they were equally authoritative.
They're analysed to the nth degree
Most of the data is analysed monthly (any bets on how it will be before someone produces a weekly index?). In itself, monthly data isn't a problem. The problem lies in trying to discern anything meaningful from such a small data set. There are around 150,000 residential property sales a month in the UK at the moment. So each month's data represents about 0.5% of our total housing stock of 25 million and most surveys only look at a fraction of sales each month.
It's a bit like trying to calculate someone's average speed on a long car journey by just looking at how fast they're going over a period of a few minutes. They could be speeding down a motorway or waiting at some traffic lights. In either case, you're not going to get any useful information.
The folly of forecasting
Each small bit of data is then used to predict what might happen next. Could the long period of growth we've enjoyed be easing or even reversing? Forecasts, especially those about most people's biggest asset, make cheap and easy copy unfortunately. So they are afforded much more weight than they deserve.
Surely it must be obvious to most people by now that nobody has the slightest idea what house prices will do next. Previous forecasts have been so hopelessly wrong but there is always a new prediction to divert your attention from that fact.
As it happens, I find it oddly therapeutic not knowing which direction the housing market will go next. Everyone else seems a little exasperated by this, convinced that a financial writer should have some special insight. Nobody does though and appreciating this simple fact can save you many hours of futile house price angst.
