Tackling the issue in this week’s Market Watch are:
Alison Beech, business relationship director of Valunation
David Thorpe, founder of Acadametrics
Matthew Edmonds, economist for RICS
Alison Beech, business relationship director of Valunation
There are a number of reasons to question the relevance and validity of national house price indices.
The fact that several are based on completion data builds in an inevitable time lag. The average transaction takes between 13 and 16 weeks, so the indices are only really commenting on market activity some three months previously. There are also regional, and even local, variations in activity and therefore price.
There are so many influential factors which determine price – school catchment areas, transport links, environmental issues, crime levels and rental activity are just a few.
Some localities and regions will generally remain relatively static regardless of what’s happening in the wider market and will see only gentle rises and falls.
Similarly, other regions have their own micro-market, such as central London, where factors influencing the UK market as a whole do not impact to the same degree. Some areas may see dramatic increases driven by demand, while others will plunge equally dramatically, steered by economic factors such as unemployment, community corrosion or repossession activity.
Indices cannot take account of local market changes, so will inevitably “smooth” the variations and come up with a number.
In reality, real house price movements are much greater – both up and down. So if an index suggested a 0.6% monthly rise, is a house that was worth £100,000 now worth £100,600?
Those sorts of movements simply don’t reflect what really happens.
As a general benchmark of UK market variations over any given time period, I’ll grant that indices have some relevance.
However, as an indicator of real-time market activity or property values, they are irrelevant.
As a guide to value for an individual considering whether to buy or sell, I’d go so far as to say they are highly misleading.
To have any use at all, an index would need to show local variations and the range of movements across the whole market. Even then, they would be of fairly limited application and use.
David Thorpe, founder of Acadametrics
National house price indices are important for such sectors as government bodies, derivatives markets and for international organisations, which may be looking at the UK for business or investment purposes.
A national house price index is also a key point of reference within statistics used in analysis and decision making.
Perhaps the question should be more about whether an index can provide, in addition to a national view, a better understanding of what is happening at a more local level.
We very much agree that only regional, county and London borough indices can show the dynamic price changes taking place across the country as a whole, which is why our own index shows prices and price changes at these levels on a monthly basis.
Our index does not show prices and movements by property type, but the information is freely available and most index providers supply information to broaden out analyses of the market.
Within the UK, it is probably worth noting that much of the debate on indices revolves around why there are differences between them.
One index may report an average house price in the month with a certain percentage change year-on-year, whilst others may highlight a different price and percentage change.
Each index is built using differing data sets and different methodologies. Understanding these differences does address much of the mis-understandings that occur and this is something we will look at shortly by comparing house price indices and explaining some of the differences.
Matthew Edmonds, economist for RICS
The RICS housing market survey is one of the most widely watched sentiment indices in the UK and has been running for over thirty years. It aims to measure the breadth of surveyors reporting price changes rather than the depth of the price changes.
By measuring sentiment rather than actual price changes, we are able to gauge the mood amongst the people on the ground.
For example, we are able to draw on our members’ expectations of future market activity; something that can not be captured by the hard data. Furthermore, sentiment surveys are timelier than hard data, often serving as a lead indicator and are not subject to revision.
Given these characteristics, our survey is closely watched by policy makers, the Bank of England and financial markets in order to try and gain an insight as to what is driving past movements and where the market may be heading.
The RICS headline price balance has historically been a reliable lead indicator of future trends in the Nationwide and Halifax price indices. The RICS new buyer enquiries balance also tends to lead changes in the official Bank of England mortgage approvals data and thus the level of transactions in the property market.
The survey’s latest results show that more respondents are still seeing price falls rather than rises, though the majority of respondents seeing falls are reporting them within the 0% to 2% range.
The survey’s activity indicators shed some light on this moderate downward trend; new buyer enquiries are falling slightly while new vendor instructions are edging up.
Looking forward, surveyors expect sales to remain broadly stable but they expect prices to fall further.
