Making Sense of House Prices in the UK Housing Market
In the UK it is almost impossible to go more than a few days before some aspect of the housing market and house prices is in the news. We do seem to have an obsession with house prices in the UK, but this is hardly surprising as for homeowners this is a direct measure of their personal wealth (or lack of it).
The problem is that house price information comes from a variety of sources and can be interpreted in a number of ways. The only way to make sense of all this house price information is to have an understanding what each major source of house price information is telling you and what the implications are for this information.
There are 2 main categories of house price information, the first is based on the asking price of houses, and the second is based on the actual sale price of houses.
House asking prices
The property selling website rightmove.co.uk often gives information on house price inflation. This is information is frequently picked up in the press and media and sensationalised to make a good story.
Data released by Right Move is based on the asking price of houses. Typically asking prices are raised in the Spring as Estate Agents try and talk up the market going in to what is usually the busiest time of year for house sales. There is therefore a tendency to inflate asking prices in advance of this upturn in anticipated market upturn. This may or may not bear any relation to what price houses are actually sold for.
It is not unknown for the press to take a one month increase in house asking prices (maybe say 1%), multiply this by 12 to give a newspaper selling headline reporting a housing market boom. Don't be fooled! It is generally best to give a very low credibility rating to this kind of market report.
For a more respected view the Royal Institute of Chartered Surveyors produces a monthly Housing Market Survey which takes a more balanced look at the market based on information provided by their own surveyors. Increasingly used by City forecasters and the Bank of England, the monthly survey is often the first to identify the changes in the market across England, Wales, Scotland and Northern Ireland.
Building societies such as Nationwide and the Halifax produce monthly housing market updates which are based on their mortgage approvals for potential house sales. This is a somewhat more reliable measure of how house prices are moving, but may slightly lag the current market, as there will be up to a few weeks delay between the day a price is agreed on and the time mortgages have been approved.
Again there are other factors to bear in mind that can distort the data. For example there may be regional variations in house price changes across the UK, although these are often catered for in the information provided. However distortion can occur for example if house price sales are particularly slow at the lower end of the housing market compared with more expensive property. This would lead to more mortgages being approved for more expensive property than average which in turn would increase house price inflation above what it really should be overall.
Land Registry House Price Index (HPI)
The HPI is published by Land Registry using sales data collected on all residential housing transactions, whether for cash or with a mortgage, in England and Wales since January 1995. A statistical method is used based on comparing actual sales prices of properties which have changed hands more than once over this time period. There are over 5 million "matching pairs" in the database as at 2012.
Of all the measures of house price inflation, in the long run this is probably the most accurate. In the short term it does suffer from the lag which is inevitable between a house sale being agreed at a given price, the sale proceeding to completion, and the sale price reaching the Land Registry database. This delay could be from 3 - 6 months in some instances. If you are not too worried about the housing market "today" then this is probably the best indicator to use for long run house price inflation.