The truth about house prices

What's really going on in the housing market? We show you how to find out.

It's always the number one question on every mortgage borrower and homebuyer's lips: "Are house prices going to crash again?"

If you don't know the answer, then I bet you have an opinion. But ask yourself this: is your opinion based on fact - or feeling?

With all the talk about a double-dip recession, I'm sure that, at dinner parties up and down the country, homeowners are desperately trying to stay positive. "We live on a small island," I can imagine them saying to one another as they gulp down large glasses of red wine. "It's a fundamental question of demand and supply. Of course there's not going to be a crash."

Meanwhile, first-time buyers are holding hands and gazing shyly into each other's eyes: "It's a hovel in the ground with a letterbox," they're saying, "but maybe soon, with a bit of luck and another global economic crisis, we will actually be able to afford to buy it!"

A more scientific way to figure out what's really going on with house prices would be to look at recent movements in house prices, as shown by a house price index. Compiled by a wide variety of different bodies involved in the homebuying process (the Government, mortgage lenders, property websites, surveyors, you name it), these indices claim to reveal how house prices have changed on a monthly and yearly basis.

Sorry, hold on, did I say scientific? The problem with these indices - and the reason you can't rely on them when making what will probably be the biggest financial decision of your life - is that they can't agree on what's happening.  In fact, the disparity between different indices is so great you could be forgiven for wondering whether they are analysing prices in the same country.

For example, a few weeks ago, Nationwide published its monthly house price index, which showed that house prices fell 0.9% in the month to August, with the pace of falls picking up from 0.5% in July.

Days later, the Halifax House Price Index was published, showing the opposite - that prices rose by 0.2% in August, following a 0.7% rise in July.

And what about Rightmove’s monthly house price index? Well, it showed that the average asking price dropped by 1.7% in August, after a 0.6% drop in July.

And it's not just changes in trends. They also differ wildly on the average price of a property, ranging from £166,507 to £232,241.

House price indices can, however, be a helpful tool for property hunters and homeowners. You just need to know how to use them.

Why do house price indices have different conclusions?

The most important thing to understand is that each index collects data from a different stage in the homebuying process. So, for example, Rightmove looks at asking prices, while the Land Registry publishes data about actual house prices sold in a particular area.

There are advantages and disadvantages to each index, and some are more accurate representations of the market than others, as this table shows.

It is really only by keeping an eye on data from all the different indices that you can get a true sense of what is going on in the housing market, at all the different stages.

Even then, however, I'd take them with a pinch of salt. Most of these indices are ‘seasonally adjusted', mainly because the compilers are interested in underlying trends - they don't like to see their perfect growth charts suddenly dip just because it's Christmas and no one has time to buy and sell their homes. This means if you are buying a property during what is traditionally seen as ‘a quiet period' (such as mid-Summer or early January), the information shown in an index may not reflect the true conditions of the market.

What's more, most indices look at national trends, and only give a regional breakdown at the most. If you really want to know what is happening to house prices on your street or in the area you want to buy, the best index to look at is not published in a document or heralded with predictions of doom and gloom in the media. It is, however, very easy to find. Simply walk down your local high street - and look periodically in your local estate agent's window.

That's not to say house price indices don't have their moments. Whether they predict a boom or a bust, are wildly inaccurate or spot on, there's certainly one use they're always good for. That's right: showing off at pretentious dinner parties...

Get the right mortgage

Whether you're looking to get on the ladder, upsize, downsize or even just stay put, it's worth putting in a bit of effort to get the right mortgage to suit your circumstances - especially if you haven't taken a look at the market-leading deals for a while. Here are the best available at the moment:

10 fabulous fixed-rates

10 tremendous trackers

More: Landlords: lower your costs | Pay less for your perfect property

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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