HOUSEprices
property, this index might be more worth tracking than the better known indices, from which it diverged in 2011. Despite three months of fall-back, the Primelocation index still shows prime property prices increasing 3.65 per cent year on year to February 2012, against national prices 0.9 per cent down (Nationwide). Some idea of the variety of datasets used can be gained by
looking at how many properties each index tracks. At the top end, Rightmove tracks 200,000 a month, and Land Registry, 100,000 a month; at the lower end, Halifax tracks 15,000, and the DCLG index takes a sample of 25,000 completions from lenders.
TIMING IS EVERYTHING
The stage at which the data is taken also varies, and this affects both the prices reported, and the timeliness of the index. For instance Rightmove reports asking prices at the time the property is put on the market; this will quickly reflect changes in market sentiment so it can be seen as a lead indicator. Halifax and Nationwide report mortgages on approval of the loan, a little later in the chain, while the Land Registry and LSL indices report completions. While that’s high quality data, it is not particularly timely, full figures might not be available for three months after the date of completion. Academetrics notes that “speed to market comes at a price”, the samples in the earliest reporting indices may not be as reliable as the full Land Registry data. LSL/Academetrics gets round the problem of tardy Land
Registry data by issuing forecasts which use the other indices to adjust the previous month’s Land Registry figures. The forecast is then updated twice in the month as the figures become available.
TECHNIQUES
The LSL figures also report the level of transactions, as well as price. That makes LSL a particularly useful index for estate agents who can easily gauge how the market is developing and check their own inventory development against the market. Different indices also use different techniques for smoothing out
seasonal fluctuations. Some don’t adjust, though this exposes the index to high volatility. Some adopt seasonal adjustment techniques that allow for the fact that the spring always sees more house-hunting and purchase activity than is the case later in the year. Halifax and Nationwide report both seasonally adjusted and non-adjusted data. Seasonal adjustments are often reported in the press. But what’s
not widely reported is how the various indices adjust for the mix of properties represented. For instance, many of the indices are ‘mix adjusted’, but not all of them are adjusted in the same way. This is what explains the differences in average house price. The Land Registry takes a simple average of all the prices of property transactions in the month, so if there are more London properties, or more larger detached houses, the average price will increase simply because of the mix. Nationwide, on the other hand, says “we track representative
house prices over time rather than the simple average price.” It uses a hedonic regression model, in plain English, this accounts for the characteristics of the properties in the index, so for instance it tries to analyse the price of ‘terracedness’ or ‘detachedness’, the number of bedrooms, and so on. Halifax uses a similar approach. Other indices are mix-adjusted. Instead of trying to assess the
characteristics of a property and ‘price’ each one, they divide the market into ‘cells’ (one bedroom flats, terraced houses, large detached houses) and allocate each transaction price to the relevant ‘cell’. The average prices for each type of property are then used to produce the overall average. This can work at a high level
of detail, the DCLG index for instance has a specific cell just for “second-hand, semi-detached houses with six rooms bought by first-time buyers in the North-East.”
FASCINATING FACTS
While the exact mathematics is only of interest to the more nerdy of us, the adjustment chosen does tend to skew indices one way or the other. For instance the mix-adjusted index rose a third faster than simple average prices in the 1980s as cheaper houses predominated. There are other statistical sources, of course, as well as indices.
For instance Hometrack produces a survey, rather than an index, asking 5,000 agents and surveyors about pricing, rental values, and so on, for various types and sizes of property. Obviously, this is based on individuals’ subjective assessments of the market, rather than achieved prices, but its big advantage for professionals (as opposed to homeowners) is that it gives other data too, the average time property spends on the market, changes in the volume of property listings, and what percentage of the asking price is being achieved. (The latter is quite interesting; it was 96 per cent at the top of the market, reached its nadir in February 2009 at 88 per cent, and has now rebounded to 92.9 per cent.)
Hometrack produces a survey, rather than an index, of 5000 agents.’
Similarly, RICS carries out a survey, giving the percentage of
surveyors who think that prices are rising or falling. That is obviously subjective, but it has proven to be a timely forward indicator, and quite good at predicting changes in the market’s direction. It’s also a good check on inventory. One name that is rarely mentioned in relation to house prices is
IPD, better known for its commercial property indices. But IPD does produce a residential property index; its big difference is that it looks at homes from the point of view of the portfolio investor, analysing returns rather than prices. IPD’s Mark Weedon says the index showed strong returns continuing in 2011, with total returns at 11.3 per cent, ahead of all other classes of property. With residential property increasingly viewed as an investment, and institutional investors for the first time getting interested in the residential market, we will probably be hearing a lot more about the IPD index over the next few years. In February this year, IPD included residential in its ‘all property’ index for the first time, sending a very clear message that rental yields are as important as
PROPERTYdrum JUNE 2012 41
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