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House Price Indices – what do they tell us?

Posted: December 2012

By Jo Eccles

The press is full of statistics relating to the housing market: asking prices, sold prices, area trends, inquiries…the list goes on. However, a lot of these reports show different figures and can often contradict one another. Confusing? Yes. Helpful? That depends.

A house sale/purchase in England is quite a lengthy process, ranging from putting the property onto the market, to agreeing an offer, to having a survey carried out, a mortgage approved, and finally, exchange and completion. One main reason for the difference in house price indices and surveys is that they track different parts of the sale process.

Online property portal, Rightmove, claims to list 90% of the UK’s residential property for sale. Its house price index focuses on the very first stage of the buying process, when a property is put onto the market at a certain asking price. The index tracks asking prices and changes in those asking prices, using a sample of 200,000 properties each month. This can be a good indicator of initial asking prices, and any official asking price changes, but it does not take into account the subsequent price negotiations and the eventual price at which the property actually sold.

The Royal Institute of Chartered Surveyors (RICS) Housing Market Survey focuses on the next stage of the buying process, when a purchase has been agreed and a survey is carried out. Each month RICS asks approximately 285 chartered surveyors whether they think house prices have risen, fallen, or stayed the same over the previous three months. Whilst this gives some indication on the direction of the market, it is based on surveyors’ opinions, rather than hard facts, and it also doesn’t go into detail about how much prices are rising or falling.

The next step of the buying process, if you are borrowing, is having your mortgage approved. The two main indices tracking this stage are compiled by mortgage lenders, Nationwide and Halifax, which produce slightly different figures as they have different methods of compiling the data. This explains why they often publish contradictory figures, and it must be noted that there are two main draw backs with these indices. Firstly, they only take into account properties which are being bought with a mortgage and completely exclude purchases where no mortgage was required. In some parts of the UK, especially London, cash purchases represent a significant proportion of the market and this is not captured. Secondly, the index does not account for purchases which did not go ahead, after the mortgage was approved.

The final stages of the buying process are exchange and completion, and as UK property is a registered asset, all completions are recorded by Land Registry. This gives an accurate figure of all completed transactions, but the downfall with these figures is that they can be quite out of date because the time scale between a property going onto the market, completing and then being recorded by Land Registry, can take months in most cases, so the completed prices often don’t reflect the current market.

Our own clients often cite figures from some of the above indices and we always remind them that they give almost no insight for their own individual property search. The above demonstrates that all indices differ depending on the data they use, so to gain meaningful pricing information, my advice is to focus on the area you’re looking to buy in, focusing only on specific and comparable properties, rather than the area as a whole.

If you have a question you’d like Jo to answer please email info@sppropertygroup.com or tweet her @joeccles.