Why is there so much confusion concerning house prices?

The above question has been asked on a number of occasions recently, especially as some house price surveys indicate the market is almost in freefall and others indicate that prices are actually rising.

A selection of the most recent figures available show that both the Halifax and Nationwide house price indexes showed a monthly drop in May of 2.4% and 2.5% respectively, leading to annual falls of 3.8% and 4.4% with both forecasting further falls. In contrast Prime Location reported a rise in prices of 0.4% giving an annual increase of 6.9%, and the Land Registry reported 0% movement in May with an annual increase of 1.8%

So why the difference? And more importantly, who is right?

To find out the answer to those questions, we need to examine how the data is gathered and identify how that might effect the results. In the case of Prime Location, and similar indexes such as those published by Rightmove, the data is based on asking prices rather than sold prices, and whilst they certainly give a feel for the mood of the market, we believe in this exercise, they should be ignored.

The Halifax and Nationwide indices are based on the sale of properties that they have granted mortgages on, and this is where we begin to see the reason for the difference.

Firstly, the data can be influenced by the number and type of customers applying for mortgages. For instance, if they have a particularly good deal for first time buyers, first time buyers are likely to make up a disproportionately large percentage of the data, which will then be overweight in terms of lower value starter homes typical of first purchases.

Secondly, virtually all property bought with the help of a mortgage will have been “valued for mortgage purposes”. This means that a valuer would have carried out a valuation, the sole purpose of which is to confirm to the lender that the value is correct. If the valuer makes a mistake, and it turns out that the house is worth less than the valuation, the lender could lose out. Therefore, when the media is full of predictions of a crash, the valuer is likely to take a much more conservative view, especially if the lender employing him has already said publicly that they expect house prices to drop by 9% this year! A self-fulfilling prophesy?

The Land Registry data is compiled from every transfer of ownership of registered land, regardless of whether there is a mortgage on the property or not, and the sample is therefore significantly larger. Whilst some of the data will have been influenced by the policies and practices of lenders and the valuers, the influence is much less with such a wide sample.

The above has, I hope, explained why there are differences between the various indices. As for who is right, that’s easy, it’s the Land Registry. It is just such a shame that many parts of the media continue to show a preference to bad news and scaremongering, rather than reporting the facts.