House price Indexes:
How do I interpret them?
Assets Accounting, in this article, will sift through all the hyperbole and nonsense to explain the methodology of each report. You decide which one you should take notice of.
House prices have risen for a good few years since covid, but with the recent interest rate hikes, they appear to now be taking a breather. In some areas, they have also gone noticeably lower.
So, what do these reports really tell us?
The best way of answering that is to understand the methodology of each, so we can rationally what they are telling us. Generally speaking, each report is compiled differently - there is no consistent approach.
There are a number of monthly reports into the property market in the UK. Perhaps the best-known monthly property reports are those from Nationwide, Halifax, the recently combined Land Registry and Office for National Statistics (ONS) UK House Price Index, the Royal Institution of Chartered Surveyors, Rightmove and Hometrack,
The subsequent media coverage of these reports is then based on the media’s interpretation of the data, which can then leave room for even more confusion. For example, a price report may indicate that prices have risen by 0.6% year on year, but fallen 0.2% month on month, generating headlines in three different places as follows: "House prices on the up", "House prices slip" and "House prices stable". No wonder there is such public confusion! Added to which there can be large variations by region.
How are house prices calculated in these reports?
Some of these reports may focus on either estate agents or property valuers going to properties that are up for sale and then scale this up to represent the whole market. Others use actual transaction data. I explain each methodology below.
The housing reports
Nationwide and Halifax
The Nationwide is a building society and The Halifax is now a bank, but started as a building society. They have an almost identical approach to one another.
Before a bank or building society approves a mortgage, it will send out a valuer to check the property is worth as much as the agreed price. Their valuer’s decision on the actual house’s worth is then added to their database.
Broadly speaking, the two lenders then take a sample of their database figures and see what movement there has been from a similar sample a month before and a year before.
These reports are based just on mortgage approvals, and are only a sample, and by definition only include their own activity, which means a whole chunk of the market is excluded (other lenders' data, cash purchases etc).
Also, the actual price paid/agreed at house exchange time can alter due to some last-minute horse trading between buyer and seller.
Finally, it can be argued that these reports are actually a reflection of their business rather than the housing market.
The UK House Price Index (HPI)
This is a report by the Office for National Statistics (ONS) using data from the Land Registry. It looks at the actual transaction price of houses sold crossed with type of property bought (e.g. detached or semi-detached, location etc)
This is the most accurate report as it includes private and cash sales which may not have gone through any property professionals’ hands.
Very relevant data without doubt, however it can take months between a property selling and it being registered with the new owners. This means the Land Registry figures are always behind the market. It also only sees properties that completed the sale with no information in sale "fall- throughs."
In addition, there is no information on what the initial asking price was compared to the selling price (discount on price)
The Royal Institution of Chartered Surveyors (RICS)
RICS asks its members every month whether they are seeing house prices rise or fall, then turns this into a percentage.
They report the number of people seeing prices rises against seeing house price falls as a percentage. For example, one month 27% more surveyors might see house prices rise rather than fall, or 16% more surveyors might see prices fall than rise. These responses lead to a sentiment rating which is a positive or negative figure depending on the majority view.
Rightmove
The Rightmove report is based on the asking price of sellers. It's a little like looking in estate agents' windows (admittedly over 90% of windows across the country) to assess house price movement. It is more a snapshot on sellers’ expectations.
Any properties on the market with other portals are excluded.
The Rightmove report does not tell you what houses are selling for, only what they are advertised at. Not all homes sell for their original asking price and a significant percentage of the homes in the Rightmove index never sell at all. They may be taken off the market or fall-through during the conveyancing process.
Hometrack
Hometrack uses a “repeat sales methodology” which looks at “pairs” of price points for properties that have sold more than once to compare the price change to when it was sold before. It also uses mortgage valuations and data from agreed sales which it gets from estate agents.
Hometrack claim that they use more input data than any other to accurately reflect house price trends.
As before, the Land Registry figures are 100% accurate, but months behind so that data is always lagging.
Conclusion
As you can see from the above information, house price reports can be interesting but only give a flavour of what is generally happening in the property market.
However, vendors and buyers should do their own local research as the figures broadcast in the national media are, by definition, national figures.
The UK property market can be described as a "Malteser" - in other words made up of lots of tiny individual bubbles - any overall statistics can be very misleading.
A property is worth, and in reality always has been and always will be worth, what a buyer is prepared to pay for it.
