House Prices
Making more sense out of house prices
Establishing likely house values is important for intermediaries who are trying to fit ever tighter deposits or loan to value requirements from lenders
by
Richard Sexton, business
development director,
e.surv Chartered Surveyors
My esteemed colleague Mark Graves kicked this column off admirably last issue, with recognition that there are a variety of measures of house price movement, some of which conflict, from time to time. Contrary to some recently expressed views, this in itself is not cause to declare that global armageddeon has descended upon us - neither is it unexpected if one understands how the measures are calculated and the fact that there is far less data around regarding house prices than there has been for many years. Most commentators are predicting total UK sales in the region of 600,000 in 2010, against a long term average of circa 1.2m. I would recommend that business models use a similar figure for 2011 as we approach the time for pulling company budgets together for next year. Reviewing the chart above, one can see that there is actually very broad agreement between all the major measures regarding the trend and amount of house price changes over the last 12 months. Ignoring individual measures for the moment, on balance, the consensus view is that house price growth started to rise again somewhere between Oct/Nov 2009 and peaked in Apr/May 2010. Since then, house price inflation has slowed, influenced by a greater supply of houses coming onto the market after HIPs were removed and wider economic uncertainty. Extrapolating the trends, we would
expect further slowing in house prices and perhaps very modest price reductions over the next six months, though not the ‘crash’ much beloved of tabloid journalists and pessimistic market commentators. Predictions beyond that time frame require a crystal ball or Tardis and should therefore be treated with caution. So, apart from potential errors, what explanation is there for the differences between the measures? One mainstream newspaper said recently that the Halifax lender index “should come with a very large health warning” and similar criticisms can be found for each and every index if you look hard enough. However, inappropriate comparisons and unproven claims are unhelpful as every measure is valid and adds value, providing you understand the context within which it is produced. When comparing measures, it is essential to bear in mind that with most measures or indices you are not comparing like with like and to understand exactly what it is you are comparing, for example:
• The Rightmove survey is based on asking prices, not completions, which can occur 3-6 months later at different figures. • Hometrack and the RICS describe their figures as surveys - essentially both sample a number of parties and ask individual opinions on what prices are doing.
• Nationwide and Halifax do not identify the level of data in their samples but are basing figures on the mortgages they offer as an individual lender; these are relatively small numbers at this point in time compared to long term averages, as each is doing fewer mortgages than they were a couple of years ago, results may also
42 Mortgage introducer NOVEMBER 2010
be subject to any market segmentation bias, for example, if a lender lends to a large number of First Time Buyers, related property prices in the sample will, on average, be lower and at an end of the market with potentially greater volatility than the wider housing market, or, if the lender lends mostly in the north or in the south, the figures are likely to be relatively lower or higher than an index that takes in figures from the UK as a whole. • CLG data is based on a wider sample of mortgage completion data, but does not seasonally adjust figures and does not include cash purchases, which have been estimated at up to 30% of the market in recent times.
• Land Registry data is a comparison of current prices against a notional set of property values chosen in 2006. • The LSL Acadametrics House Price Index includes cash purchase prices and smoothing, which displays the trend over time while discounting any unusual spikes, and is based upon the complete, factual, house price data for England and Wales, as opposed to a sample. When selecting your preferred index, ask yourself four simple questions: 1. Where in the housing transaction process is the measure being made and what are the implications of that on reported value? 2 How representative is the data in respect of the wider market or your local circumstances? 3. What unintentional bias might the methodology applied introduce to the results? 4. Is the ‘tone’ of the index in line with most others? ‘Outliers’, results that are significantly outside the norm, are either
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