Why do house price indexes vary so much?
House price indexes come in all shapes and sizes, which can be perplexing for people uninitiated in the art of house price academia and methodology, writes David Newnes, director of LSL Property Services.
In truth, house price indexes aren’t as arcane and esoteric as they first appear. In fact, there are important differences which make some indexes considerably better than others. There are five major indices, produced by Halifax, Nationwide, LSL Property Services/Acadametrics, the Office of National Statistics (ONS), and the Land Registry.
Halifax and Nationwide are both big household names. But big doesn’t necessarily mean best. Ironically, both their respective house price indexes are let down by their scale. Or, more specifically, the relatively small sample sizes they are built on.
The main problem with the Halifax and Nationwide incarnations is that they are based on just their own limited mortgage data. With transactions levels low, it means the sample size can vary wildly and only represents a small sliver of the market. Halifax also has a northern bias due to it’s larger customer base in the north, so doesn’t reflect the UK average. Nationwide has the opposite problem, with its customer base weighted towards the south. It’s a flaw accentuated by the growing north-south divide in the performance of the house prices and sales since the banking collapse.
And, significantly, both the Nationwide and Halifax Index don’t take into account cash purchases. That would be a major deficiency even during the glory days of the mortgage market, but it is a cardinal sin given cash purchases currently account for a roughly a third of all house sales thanks to the scarcity of home loans. Clearly this means the accuracy of the index is vulnerable in months when there are low numbers of transactions. The ONS index suffers from precisely the same failings.
The LSL Property Services/Acadametrics Index uses a different methodology which is, frankly, more robust. It extrapolates data from Land Registry house price data and is seasonally and mix-adjusted by property type, which means it based on every sale – including cash purchases – rather than just a small sample size based on mortgage approvals. The LSL/Acad Index collects data for sales reported within a month, including sales achieved in previous months and determines average prices. These are given to Acadametrics which mix adjusts them to give an average price that is not skewed by changes in the types of properties sold each month.
The flaw with the basic Land Registry data is it is changed retrospectively due to the lag between sale completions and registrations. While this is more accurate over a period of time, it does mean the figure you use when the index first comes out can be changed further down the line.
Although the LSL/Acad Index is based on the Land Registry data, it overcomes the issue with the lag time by forecasting prices based on doing an index of the indices which come out before it. This means it is more up-to-date than the Land Registry. Only a third of sales carried out in a month are recorded by the end of that month, so LSL/Acad indexes the indexes which come out before it to accurately forecast the other two-thirds of sales figures.
This is a guest post by David Newnes, director of LSL Property Services, owner of Your Move and Reeds Rainshouse prices indexes, real estate
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