FTA In Depth: Putting a price on the housing market
- Story by: Donia O'Loughlin
- Magazine: FTAdviser
- Published Wednesday , December 08, 2010
But with each giving widely differing pictures of the state of the housing market, consumer groups are questioning their validity.
The Office for National Statistics (ONS) appears to agree.
It is investigating what it called the "coherence and comparability" of house price indices after a number of people confessed being confused by the data.
Industry professionals are dismissive of the OFT's investigation. They claim the mixed picture is due to the different kinds of methodology used and that the data does not conflict because different indices track different elements of the housing market.
The five main indices in the market include LSL Acadametrics house price index, Rightmove, Nationwide and the Communities and Local Government (CLG).
Stuart Law, chief executive at Assetz, said: "It is important to remember that the monthly indices use different sources of data and represent the different stages of the buying process such as asking prices, mortgage approvals and sold prices."
For example Rightmove tracks asking prices for properties, whereas Halifax and Nationwide only look at their own mortgage completions so use smaller samples, while the Land Registry looks at completions.
Pick and mix
Richard Sexton, business development director at E.surv, claimed the the indicies catered to different elements of the house-buying public.
Mr Sexton added: "People need to decide what they are interested in and then pick their index."
Martin Ellis, housing economist at Halifax, added that there was demand for house price indices and providers were keen to provide the information but that the results were sometimes inappropriately applied with erroneous results.
Mr Ellis said: "At times it can be confusing for consumers. "Perhaps some providers need to make their methodology clearer and the media should also highlight the methodology to emphasise to consumers how this data was reached."
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics), said the housing market was not a single market and that indices sometimes treated it as such.
He said: "Consumers need to look at the locality for individual sales such as a borough in London or an individual street.
"The headline growth rates are often quite misleading and this adds to the confusion.
"If you live in a ‘bad’ area or a ‘good’ area, the headline figures will not be relevant to you. Even regional statistics cover a broad area. There will always be that issue with regional data."
Go local
Instead of focusing on indices, Mr Law urged consumers to look at what is happening locally. This, he said, would give house-buyers a more accurate reflection of waht was going on.
He said: "Each area is localised and researching what is happening to house prices where you are trying to buy or sell is the best indicator as to what prices are being achieved."
Mr Sexton and Mr Law agred that the LSL/Acadametrics index was the most accurate out of all the indices.
Mr Sexton said: "Essentially it is an index of indices and therefore should smooth out errors that may distort others over the short term."
Mr Law added: "We have found this to be very accurate indeed and is often little revised over following months from the initial estimated announcement.
"We believe it uses the best and largest sample of housing transaction data in the UK."
Mr Rubinsohn classed the Land Registry index as more authoritative than the others.
He said: "It gives more observations than the others as it includes sales and transaction levels but it only covers England and Wales and lags behind the rest of the market by a few months.
"The methodology reports sales but only resales – it doesn’t report on the new build market. It has its faults but in my opinion it is the best indicator.
"Although I think this one has more merits, it doesn't mean that others are obsolete."
One index, one standard?
Mr Law believes there should be an industry standard for the property market and claimed that LSL Acadametrics index provides the best model for this. This was largely due to the immediate data based upon most of the mortgage offers in the UK and the large sample sizes used.
Mr Sexton and Mr Ellis disagree.
Mr Sexton said: "My opinion is that the best measure is the change in the completed sales price for a given sale, including all transactions i.e. those supported by mortgage plus cash purchases.
"To be useful, an index needs to answer in a broad, perhaps regional average, sort of way how much a property is worth in today's market if it was bought a year ago answer this."
Mr Ellis added: "If you put the housing indices together in the right order from mortgage applications to completions, they surprisingly show the same things/patterns.
"It's important for a consumer not to put too much value on a particular index if you are just looking at a monthly basis but you need to look at a longer three-month trend that gives a better indicator."
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