House prices rose for a good few years, then plummeted and are now rising again. They have been a conversation piece at many a dinner party over the years but what is really going on? There is a raft of reports every single month – just recently three were published on three consecutive days and were all widely reported in the media. The constantly contradictory content only serves to create confusion amongst the general public.
So what do these reports really tell us?
The best way of answering that is to understand the methodology of each, so a rational decision can be made as to the validity thereof. Generally speaking, each report is compiled in a different manner to the rest – there is a distinct absence of consistency in approach.
There are a number of monthly reports into the property market in the UK. Perhaps the best known are those from Nationwide, Halifax, the Office for National Statistics (ONS), the Royal Institution of Chartered Surveyors (RICS), Rightmove, Hometrack and the Land Registry.
The subsequent media coverage of these reports is then based on journalists’ interpretation of the data, which in itself leaves room for even more confusion. Recently the same house price report with the key figures being that prices had risen by 0.9% year on year but fallen 0.1% month on month generated headlines in three different places as follows: “House prices on the up”, “House prices slip” and “House prices stable”. Little wonder there is such public confusion!
How are house prices calculated in these reports?
Many of these reports 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.
Nationwide and Halifax have an almost identical approach to one another.
When the bank or building society sends out a valuer to see if the property is worth as much as the buyer says, so they can approve the mortgage application and this value 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.
The fact that these reports are based on mortgage approvals, are only a sample, and by definition only include their own activity, means a whole chunk of the market is excluded (other lenders’ data, cash purchases etc).
The Office for National Statistics does not get as much coverage as Nationwide and Halifax. Their methodology involves a sample of mortgage completions data from the Regulated Mortgage Survey (RMS) as collected by the Council of Mortgage Lenders (CML). The sample size seems to be circa 65% of mortgage-related completed purchases.
They then apply their own formulas to turn this data into a notional "average" house price.
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 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, on the other hand, report on asking prices. It's a little like looking in estate agents' windows (admittedly over 90% of windows across the country) to assess house price movement.
This means only properties on the market are included.
The fact that the Rightmove report 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 all homes sell for their original asking price and a significant percentage of the homes in the Rightmove index never sell at all.
Hometrack is a company who provide data on property market activity, 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 providing valid information rather than saying what they think should be said or guessing!
The Land Registry report 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.
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 looks at homes that are changing hands.
House price reports can be interesting and useful to give a flavour of what is generally happening in the property market.
But vendors and buyers should do their own local research as the figures broadcast in the national media are, by definition, national figures. Given that the UK property market has been described recently 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.