House price indices

Indices continually appear in the national media coverage about the UK Housing Market. But what are they and what do they indicate? The housing market normally makes the headlines when the house prices boom or are on a decline. Indices are used by many different agencies to decide the current state of the housing market. The problem with indices is precisely in their nature; they are indicators, not hard fact. In Britain there are a number of agencies who have competing systems to help them to indicate the status of the market. This is where the problem of market status occurs and why there are conflicting headlines in the media at any given time about the Housing market. The different indices are based on very different data sources, hence there is disagreement as to which calculation is the most accurate at indicating the status of the Housing market.

The problem any consumer is faced with is which housing market measure is correct? It all depends on your personal interest in the housing market. If you are a first time buyer trying to get a foot into the housing market then the indices that will be most relevant to you will be those produced by the mortgage banks such as Halifax and Nationwide; as these indices will provide the practical information for a house buyer needs. Whereas if you are a member of the Bank of England’s Monetary Policy Committee, then the government’s index from the Office of the Deputy Prime Minister (ODPM) will concern you the most. This is because house prices have a direct effect on consumer spending and the ODPM provides a strong statistical representative model which can show up the trends looked for by the Monetary Policy Committee. A house builder on the other hand will have to decide whether their interest lies in providing only the basic shelter for their customers’ requirements or they want to offer them additional desirable attributes to create a luxury abode. The same information is needed by all these consumers; however it is the understanding of the way in which the information is calculated which is of most importance to the consumer.

I plan to outline the different Indices; the professional body that creates them and how they are calculated and measured. I will also include the advantages and disadvantages houseprice.org associates with each one.

The index that houseprice.org thinks is most reliable due to the comprehensiveness of its information is the HM Land Registry. The Land Registry is an official organization that records the price of every property in England and Wales , on behalf of the government. There is a separate Scottish and Northern Irish Land Registry. The Land Registry produces a quarterly house-price index and is generally regarded as the definitive guide to the housing market, due to its up to date comprehensive data. The Land Registry calculates a ‘basic average’ from the total value of all the homes sold within a three month period in order to determine its index.

The major advantage houseprice.org believes this index has is the fact that it is an inclusive list of every property in England and Wales , so it is not ignoring any part of the Housing Market and it is a strong statistical model. However, as the Land Registry only calculates a ‘basic average’ of the properties sold, any rise or fall in the index may not actually reflect the price movements of the market. This is due to the simple fact that if more expensive or cheaper properties are sold within the three month period then this will affect the calculation of the ‘basic average.’ For example if a celebrity was to sell their very expensive house then the ‘basic average’ would rise for that period but would fall in the next. The Land Registry Index also does not account for the fact that some houses are sold more frequently than others, such as starter homes for young couples. Hence although it may be considered a ‘definitive guide’ it also has some serious drawbacks.

The other index that is closely related to the Government is the Office of the Deputy Prime Minister’s index, otherwise referred to as the ODPM index. The ODPM calculates its index based on the analysis of approximately 25,000 mortgage completions a month and it is based on estimating the market value of certain features of a house, such as a bedroom, a bathroom and a garage in particular areas of the country. This information is then used to establish the value of a house, which is then used as an indication of the status of the housing market. The ODPM also divides the market into 100,000 segments, reflecting a different type of property in a different location.

houseprice.org considers that despite having only a 25% share of the market covered, significantly lower than the Land Registry’s 100% coverage of the market share, the ODPM’s index can still be considered a solid statistical model upon which to calculate house prices. The two major drawbacks to the ODPM’s index is that it is based upon completions which are at least a month old and it can be seen to be biased towards the Southeast. This bias is the result of the index being calculated on the actual price paid for a property thus the southeast has the largest amount of expensive properties in England and Wales , which affects the calculation of the Index. However, houseprice.org considers the ODPM index to be one of the most reliable indices around and understands that it is difficult to create an index which does not create a bias towards London and the Southeast when calculating housing prices.

The leading mortgage bank Halifax has also created its own index regarding the house-price market. The Halifax uses its own database of information, relating to its 300,000 plus mortgage approvals every year in order to create its monthly index. The bank tracks the price of what it believes to be the ‘typical house.’ The index is weighted by volume rather than price when calculating house price rises. Hence if an equal number of cheap flats rise in price, while expensive detached houses fall in price by the same amount then the index would record the rate of house-price growth as zero.

The advantage that the Halifax index has, is that it covers a large share of the mortgage market and it creates monthly reports. However, houseprice.org believes that the Halifax index may be seen to be outdated, as the ‘typical house’ has not been updated since 1983 and over the last 20 years the properties on the property market have changed considerably. There is also a regional bias in the Halifax ’s calculation, as the index is more sensitive to property price changes in the North. This is because the Halifax bases its index on its own data and it created the index based on lending in 1983; at this time it had a heavy northern customer base. Continuing the issue of outdated information, houseprice.org has also noted that the Halifax does not take into account cash sales, which were not significant in 1983, but have become increasingly popular since. In summary houseprice.org believes that the Halifax misses out on important sections of the market, implying that it is unrepresentative as it has a bias towards one specific type of property buyer and it doesn’t have as stringent criteria as the government related indices.

However, another leading mortgage bank who calculates its index in roughly the same way as the Halifax , but updates its ‘typical house’ every year is the Nationwide. The Nationwide also changes its regional weighting every year in order to prevent the index creating a regional bias. The regional weighting is based on rolling averages from national mortgage data and information from the Land Registry.

The advantage that the Nationwide index has over the Halifax index, is that it is updated every year continually. However, unlike the Halifax, who has a 25% share of the mortgage market, Nationwide only has a 9% share of the mortgage market. This means that the major disadvantage that houseprice.org sees this index having, is that the index is small and unrepresentative of the overall housing market.

One of the newest indices to appear on the market is Rightmove, which bases the calculation of its index on the asking price of properties from around 3,700 Estate Agents. The index uses roughly the system the ODPM uses in order to calculate the market share, taking certain features of a home and calculating their market value.

The advantage of the Rightmove index is that the earliest indication of movement within the housing market can be gained. This is due to their source and type of information that they use to calculate the index, Estate Agents and Asking Prices, which can reflect movement in the market months before they appear in other indices. The disadvantages that houseprice.org perceives this index to have is that it is based on asking prices, which creates two problems: The first problem is that asking prices are frequently higher than the actual price a property is bought for; hence the indication may be completely inaccurate and can actually mean nothing to the house-price market. The second problem is that the index has a heavily weighted bias towards the Southeast where property prices are much higher. Another problem houseprice.org observes is that the index will not capture the market swings accurately as often the asking price tends to be less volatile than the actual sales price.   During a boom houses may sell close to asking price while during down turns houses sell at a significant discount to asking price. The Rightmove index, like the mortgage banks is also based on a small unrepresentative sample.

Hometrack is also a new index for the house-price market. Hometrack, like Rightmove gathers the information for its index from over 3,500 Estate Agents. However, unlike Rightmove it does not gather asking prices instead it bases its index on accepted offer prices. The advantages the Hometrack index has are very similar to Rightmove; it gives a much earlier indication of trends within the market, it appears to be more reliable than Rightmove as it uses accepted offer prices rather than asking prices. However, the major disadvantage of the Hometrack index which cannot be ignored is that the Estate Agents Hometrack gleans its information from do not include the large familiar chains, instead it uses small, unfamiliar Estate Agencies. This could therefore strongly bias the Hometrack index and may even lower the value of the information in the index.

There are also numerous other small indices relating to the house-price market, if a consumer is interested in more specific data. The Royal Institute of Chartered Surveyors and the National Association of Estate Agents are two such indices that houseprice.org recommends. They both publish monthly studies, using information from their members in order to provide a helpful guide to the overall state of the property market. However, neither the Institute of Chartered Surveyors nor the Association of Estate Agents provides specific statistics on house prices.

In conclusion there is no index that covers all consumers’ needs and has no disadvantages. However, houseprice.org hopes that it has provided enough information for the consumer so that they can choose to explore the index that relates closely to their individual needs and provides the resources they need to make decisions based upon the house-price market. A summary of all the indices mentioned and their advantages and disadvantages can be viewed below.

INDEX NAME MARKET SHARE ADVANTAGES DISADVANTAGES
Land Registry 100%

(Housing Market)

  1. Covers every property in England and Wales .
  2. Up-to-Date comprehensive information.
  3. Strong statistical model.
  1. Rises and Falls in Index may not reflect price movements.
  2. Doesn’t take into consideration frequency that houses are sold.
Office of Deputy Prime Minister (ODPM) 25%

(Housing Market)

  1. A fairly reliable index.
  2. Strong Statistical Model.
  1. Information more than a month old.
  2. Bias towards the Southeast.
Halifax 25%

(Mortgage market)

  1. Covers a large section of the mortgage market.
  2. Reports monthly.
  1. Based on outdated criteria.
  2. Unrepresentative of market.
  3. Bias towards a specific property buyer.
  4. Regional bias towards North.
Nationwide 9%

(Mortgage market)

  1. Has no regional bias.
  2. Reports monthly.
  3. Updates criteria yearly.
  1. Does not cover a large section of the market.
  2. Unrepresentative of market
Rightmove 35%

(Estate Agents)

  1. Provides earliest indication of house market movements.
  1. Bias towards the Southeast.
  2. Asking prices are usually higher than achieved prices so data may be inaccurate.
  3. Doesn’t capture Market Swings.
  4. Small unrepresentative sample.
Hometrack 30%

(Estate Agents)

  1. Provides earliest indication of house market movements.
  2. Based on accepted offer prices rather than asking prices.
  1. Does not include many of the larger Estate Agent chains.
  2. Bias towards the Southeast.
  3. Does not capture market swings.
  4. Small unrepresentative sample.