The truth about house prices
With so much conflicting information in the press and on TV, James Andrews of MSN Money asks what do house price stories actually tell you?
You can read the article below or click here
House prices soared for a decade, then plummeted and are now
rising again: at least that's what you read in the press. But how
much can you really trust these stories?
Barely a day goes by without some new story about the value of
homes hitting the news stands, half of it violently disagreeing
with the other half.
Let's take a look under the skin of the property reports to find
out how they are made and why they are in the news, as well as what
each one actually means.
So what are the house price stories really telling
us?
The first reason there is so much confusion in the press is that
there are so many different ways of measuring house prices.
There are eight regular, monthly reports into the property market
in the UK. Each one of them has its own strengths, weaknesses and
data sets.
Nationwide, Halifax, the Royal Institution of Chartered Surveyors
(Rics), the Land Registry, the Department for Communities and Local
Government (DCLG), the Council of Mortgage Lenders (CML), Hometrack
and Rightmove all produce monthly reports. Financial Times
Academetrics then tries to build its own report based on those ones
while websites such as Zoopla and mortgage sites produce reports
now and again to add to the fun.
Journalists produce stories based on either one or several of these
reports, they also call the people that provide the reports for
specific data from time to time - adding even more confusion to the
mix.
How do they work out house prices?
Most of these reports rely on either estate agents or property
valuers heading to properties that are up for sale and then scale
this up to represent the whole market.
Nationwide and Halifax send valuers to homes when people try to get
mortgages on them. This information is then stored away and used to
work out "average" prices for regions and the country as a
whole.
The way it works is that if someone applies for a mortgage on a
three-bed semi in Derby, the mortgage provider values it to see if
it's worth as much as the applicant says before deciding to offer
them a loan or not. This value is then added to the mortgage
provider's database.
To get from that to an "average" UK house price for the month, the
people behind the property indexes work out how many three-bed
semis there are in the country and what these are worth comapred
with other types of property.
They also look at how many examples of each type of property there
are in the UK as well as what a house in Derby is worth compared
with houses elsewhere.
That way they can move from one point (or a few points) to a
representative figure for everything - without needing to value
every home in existence to work out the average price every
month.
Of course there are some rather large problems with this
approach.
Firstly, there is no typical house. Looking at some examples and
then generalising to everything is always going to be inaccurate.
The people behind the indexes do all they can to reduce this
inaccuracy, but they can never eliminate it completely.
On top of this, you get the most data from places where the market
is moving fast as that's where most homes are for sale. Where are
most houses for sale? Where most people want or need to move from
and to.
So in an environment where a lot of people are losing their jobs,
the places worst-hit for redundancies are where the most homes are
being sold. In a booming market, the reverse is true.
This means their data always exaggerates market falls and rises as
it is biased towards places where most homes are actually changing
hands. It also entirely ignores anyone buying a home with cash
rather than a mortgage, for example pensioners, people inheriting
money or those people moving home who have paid off their mortgage
on their existing mortgage.
Who else uses these figures?
The government's Department for Communities and Local Government
(DCLG) survey and the Council of Mortgage Lenders (CML) surveys
also work with figures from mortgage valuations, although in their
cases they use data from more than one lenders. They then apply
their own formulas to turn this data into a notional "average"
house price.
On top of that, the Royal Institution of Chartered Surveyors (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 34% more
surveyors might see house prices rise rather than fall or 12% more
surveyors might see prices fall than rise.
Another way
Rightmove, by contrast, looks at the value people put their homes
up for sale at. It's the equivalent of looking in estate agents'
windows to work out what's going on with house prices.
Like Nationwide and Halifax, this means only properties on the
market are included, and there is a bias towards the most active
parts of the market. Unlike Nationwide and Halifax, properties that
are bought and sold without needing a mortgage are included.
Sadly, there's another problem with the Rightmove data: it doesn't
actually tell you what houses are selling for, only what the people
putting their homes up for sale think they are worth. Not many
homes are being sold for their original asking price these days and
some of the homes in the Rightmove index never sell at all.
The Land Registry takes a completely different approach. Rather
than estimating the growth or fall in house prices based on a few
examples and a formula, the Land Registry looks at the actual price
change in specific houses.
As all homes have to be registered with new owners after a deal is
done, the Land Registry just works out what the change in price of
each actual home registered is and how long it's been since it last
changed hands.
There is no doubting the accuracy of this data, however it can take
months between an offer being accepted and it being registered with
the new owners. This means the Land Registry figures are always
behind the market. It also only looks at homes that are changing
hands.
Hometrack takes a different approach again, looking at all areas of
the market - regardless of whether homes are being sold or not -
and asking estate agents what the value of homes in each English
and Welsh postcode is, assuming a willing seller and reasonable
time to market the home.
This approach means homes not for sale are included and the impact
of hotspots and crisis areas are minimised. However, it also
assumes that estate agents are right, as it's not based on actual
sale prices of homes.
What are the headlines about then?
There is a process a lot of journalists, broadcasters and editors
use when deciding what story to cover. Is it important? Are people
interested in it? House prices tick both boxes.
The UK housing market makes up a huge chunk of the nation's wealth.
Homes are the biggest financial transaction and store of wealth
millions of us have.
Rising prices mean people feel richer and spend more overall,
boosting the economy; falling prices can have the opposite
effect.
That alone means the fate of the housing market would be reported
on a regular basis. But there's more.
Britain is a country that can be fairly described as obsessed with
homes: this week alone there are seven different series devoted to
property on the five main terrestrial TV channels.
Five of these series are on five days a week and that's not even
counting repeats on other digital channels or the dedicated
property and garden channels people can also receive.
So we have a situation where there is a lot of news about house
prices and a lot of interest in it.
However, with so much information - all of it slightly different
and flawed - there is no way to convey what's going on simply other
than saying "house prices up" or "house prices down".
This oversimplifies what's actually going on as well as ignoring
any problems. Generally problems with reports and contradicions
between them simply aren't mentioned. All you get is the data from
that report that month and a quote or two.
To make matters worse, journalists can be guilty of writing catchy
headlines that don't neccesarily reflect the true nature of the
data.
Headlines saying "house prices falling/rising faster" are
frequently attached to pieces about the monthly Rics survey. The
monthly Rics survey doesn't tell you this, it only reports how many
surveyors think prices are up or down near them. Not how fast the
fall or rise is, simply how widespread.
Another common flaw is reports using the DCLG data and comparing it
to the previous month. The DCLG goes into some detail about how it
works out house prices, but one thing it doesn't do is compare
month to month. It's not seasonally adjusted to reflect summer
highs and winter lows - all it tells you is what prices are
compared to the same month last year.
Can we learn anything from these reports
then?
Put simply, the reports you see in the press about house prices
take the temperature of the market. You can see if things are
healthy overall, too hot or too cold.
That's useful as a first step, but a problem in one specific part
of the market needs to be pretty big before it registers on the
reports, while a negative reading overall means little for specific
sections of the market that might well be doing fine. By the same
token, a small problem everywhere will show up pretty fast.
But there's another factor at work here: the impact of the reports
themselves.
If everyone's reading about falling prices, they're going to be
less willing to buy or sell and more likely to negotiate hard with
a seller before buying.
If everyone's reading about rising prices, they could end up
spending more than they should in the hope prices will go up and
cover them or buying something inappropriate for the fear of
missing out and seeing prices rise out of their reach.
What they mean for me?
House price reports are useful, then, if for nothing more than
judging the mood of the nation and the big picture.
While this does matter, don't take it as the absolute truth. Every
single report is slightly flawed, many disagree with each other and
the only time the price of your house matters is when you need or
want to sell it or release some equity from it.
In that circumstance, the only opinion about what it's worth that
matters belongs to the person who's handing over cash.