Guide To Trading UK House Prices

If you are considering trading UK house price data it is worth knowing a little bit about the different numbers that are released. I’ve compiled a short guide that will hopefully go a little way to explaining the sources of the numbers.

Back in 1998 the then deputy governor of the Bank of England, Mervyn King, commented on the ‘puzzling and unfortunate divergence of the lender indices’.

He was referring to the fact that the two major indexes, the Halifax and the Nationwide, seemed unable to show a consistent pattern in house prices. The solution was obvious; the creation of several more indices that offer even more differing results.

In this article I’ll be lifting the bonnet and checking out the top UK house price indices and why they produce such different results. In Part Two I’ll be looking at the current state of the market and whether the recent improvement is sustainable.

The main indices differ in their approach, taking their data from all the way along the transaction chain.

Surveys

RICS (Royal Institute of Chartered Surveyors)
The RICS survey doesn’t actually report prices or changes in prices, but surveyors’ opinions on whether prices have fallen, risen or stayed the same. The headline number refers to the perceived change in house prices over the past three months. The survey is seen as a reliable indicator of the trend in house prices rather than the level of price change.

Surveyors throughout England and Wales are asked to comment on price changes for 7 categories of residential property, though presumably the Chelsea clan don’t offer much feedback on the ‘2/3 bedroom bungalow’ section.

The results are fed into a rather posh mathematical multi-chef to produce a headline index of between 0 and 100, where 50 is neutral.

Although the headline figure is the one that causes a stir on the BBC news (and is most likely to move the currency) the RICS report contains some other very useful data. The Sales to Stock ratio is thought to be a better lead indicator of future changes in house prices. This measures the change in the number of unsold properties on a surveyor’s book.

Another favourite is the New Buyers Enquiries balance, which is seen as a predictor of the future level of the Bank of England mortgage approvals.

Hometrack
Hometrack describes itself as the UK’s leading provider of residential property analysis and information (it cranks out numbers).

Based on a monthly survey of estate agents across England and Wales, this index takes into account opinions, rather than just asking prices.

The survey asks 11 questions including the estate agent’s opinion on the reasonable selling price for four standard types of property. Like the Rightmove survey, there is no seasonal adjustment.

Mortgage Lenders

Nationwide
The UK’s biggest building society uses its own mortgage approvals data to track the hypothetical price of a ‘typical UK house’ (a typical UK house? Answers on a postcard please).

Nationwide doesn’t include cash transactions (obviously), which excludes around 25% of the market. It also leaves out re-mortgages and buy-to-let properties. The index is seasonally adjusted and compares one month to the month before, and to the same month a year earlier. The index is ‘mix-adjusted’ to remove any bias towards the location or type of property.

HBOS
The UK’s largest mortgage lender, HBOS can boast a larger sample size than the Nationwide. Like the Nationwide the HBOS index tracks a fictitious ‘typical house’ using data from its own mortgage approvals, which is seasonally adjusted. It also excludes cash purchases and re-mortgages, but does include buy-to-lets.

The HBOS index compares the past 3 months with the corresponding 3 months the previous year.

Web-Sites

Rightmove
Claims to be the UK’s leading property website; it uses data from the asking prices of up to 200,000 properties that are put up for sale by estate agents that month (this number is obviously dependent on the state of the housing market), representative of around 90% of all homes for sale by estate agents. The numbers aren’t seasonally adjusted.

The prices used are the initial ‘for sale’ price so you could argue that this index overstates prices in a poor market when over-optimistic prices are eventually negotiated down (have you ever heard an estate agent say, “Oh no, I can’t sell your house at that price,” at the first valuation?). Conversely, perhaps the index understates prices in a booming market when gazumping leads to a higher conclusion.

Rightmove claim to produce a more complete survey than the mortgage lenders as 95% of sales are through an estate agent, but only 75% are purchased with a mortgage.

A Fat Bloke In An Office

CLG (Communities and Local Government index)
Previously called the Office of the Deputy Prime Minister (ODPM) index, but changed the name so that it would be taken more seriously.

When John Prescott became Deputy Prime Minister he wanted to be known for more than just thumping someone and using his secretary’s backside to polish his desk. So he commissioned yet another house price index.

This index also measures the price change on a hypothetical ‘typical’ UK house. It excludes re-mortgages, cash transactions and isn’t seasonally adjusted. This index is at the end of the chain, with data coming from completions rather than approvals. Coverage is around 50 mortgage lenders.

Being a government measure this index is subject to revisions up to 3 months after publication. The name change might help, but it’s yet to shake off the Prezzer mantle and become a hard-core index.

Land Registry
The Land Registry index holds little sway with the markets; the data flow is slow and investors pay more attention to the smoothed and more complete FTHPI.

The Media Meets Academia

FTHPI (Financial Times)
The FT wins the ‘pointy-heads’ award hands down. Its index is produced by Acadametrics (a research-based consultancy business that specialises in the housing market), who in turn use a forecasting model developed at Cambridge University.

Data is taken from the Land Registry, but this index gets over the delay in gathering the full quota of registrations by adjusting the early sample using their forecasting model; late data is incorporated as it arrives.

The FTHPI is the only UK house price index based upon every residential property transaction in England and Wales (even the almost defunct Land Registry only uses a sample of 30%) and is designed to provide a “true measure of house price inflation”. The FTHPI has been chosen by the Chicago Mercantile Exchange, the world’s largest derivative exchange, for their residential house price derivative.

So there you have it; both RICS and Hometrack provide survey results, rather than indices. The mortgage lenders base their prices on a house that doesn’t exist. Rightmove reports the opening gambit in negotiations and the FT and CLG use more accurate data, if you’re prepared to wait. And just in case that’s as clear as the sky in Beijing here’s a handy diagram provided by acadametrics.co.uk :

In the next article I’ll be looking at what results these indices have churned out recently and if they’re part of an improving trend.