House price indices are a waste of time

Mortgage broker John Charcol has claimed that Halifax's and Nationwide's house-price indices are "a farce", but is this really true?

High profile mortgage brokerage John Charcol has launched a stinging attack on house price indices from lenders like Nationwide and Halifax, declaring them a farce.

John Charcol's argument is that the headline indices for these two mortgage lenders are “seasonally adjusted”, and that this adjustment is an art, not a science, so it leads to big differences between the indices, and to abnormalities.

This in turn leads to distortions in the property market, claims the broker.

The meaning of seasonal adjustment

To start with, both Halifax and Nationwide calculate the average house price based on the mortgages they have approved, plus deposits. According to John Charcol, real house-price movements from Nationwide and Halifax customers appear to be pretty similar at that stage in the calculations.

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I'm sure most of you are thinking this sort of guesswork makes it unnecessarily complicated, and you're right. John Charcol has shown that a real increase in prices of 0.1% one month might be adjusted to +0.3% when Nationwide paints over it, whereas Halifax might use the airbrush to mark house prices down at -1%.

On top of that, each month brings small adjustments to earlier figures, and those revisions don't normally get reported in the press. Revisions also wouldn't be necessary if the lenders simply stuck to real house prices.

Is this a big problem?

John Charcol accuses these indices of “distorting the market” yet do these seasonal adjustments really make people complete a transaction at a different price to the one they otherwise would?

I would think there has to be a big difference between the reality and seasonally adjusted figures before that happens to any great extent. Here's how different the numbers compare for the past year:

Seasonal figures are as reported initially, i.e. prior to the discreet revisions that no one hears of.

There's not much in it, is there? Both the adjusted and non-adjusted figures stay within a few thousand pounds of each other each month. Are those differences going to distort the market by making properties fetch seriously “wrong” prices after the haggling is over? I don't think so either.

Journalists and experts are a slightly bigger problem

John Charcol is also concerned that the financial commentary and news reports that follow the release of seasonally adjusted figures also distort the market; for example, commentary following Halifax's recent figures has made it seem like prices are falling, but this year in real terms prices are actually a little up.

I think that commentary may indeed make a few people behave differently - for example it might have made some potential buyers decide to wait a little longer, when they might have otherwise chosen to buy. At other times, when seasonally adjusted prices are rising and real prices are falling, associated commentary might encourage sellers to put their asking prices higher.

However, those are for the most part temporary effects that disguise the real issue; namely that recent movements in house-price indices influence our decisions when they probably shouldn't at all – whether they are seasonally adjusted or not.

Buyers and sellers have no use for indices

For various articles in the past I have researched whether different indices can reliably predict the future. I have looked back at decades of data for both seasonally adjusted and non-seasonally adjusted indices. I have looked at monthly indices and quarterly ones. It turns out that you cannot use recent movements in any of them to predict the future.

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This applies regardless of the index you use. In other words, by themselves, movements in indices are useless at predicting the future, whether adjusted seasonally or not.

What is “average”?

It gets worse than that. Even if you could use movements in these indices to predict which way – and how far and fast – the average house price is going to move, who has an “average” house anyway? No one.

In the end it will come down to local factors: house prices on the street concerned, as well as the peculiarities of the individual properties themselves. The average UK property may have risen a few thousand this year to around £165,000, but worrying about the index is a waste of time for those with an interest in a property on Sycamore Road, where the price of the bungalow there has just fallen £5,000 to £130,000.

Movements in indices tell you nothing important

If you think you can time the market (I know I can't, but good luck to you), perhaps seeing where a house price index is now might help you decide if it's a good time to enter or exit. Just maybe. But that is not what this article has been about. What has concerned me today is not the level of house prices themselves, but their monthly and quarterly movements, and how they are calculated.

There aren't many criteria to decide on for whether you buy or sell now, but the direction a house price index has moved in the past month or three does not help you assess any of them.

The important criteria are your personal circumstances, such as how big a place you need, whether you're likely to keep a steady job, and how likely it is you'll be forced to move location. You also need to consider how much you like the property in question and you need to be confident you can afford the mortgage repayments not just today, but for years to come at potentially much higher interest rates.

No index movements can tell you any of those things, whether seasonally adjusted or otherwise. Ultimately it is the individual buyers and sellers who agree the worth of individual properties between them.

If you're interested in reading about the difficulties of forecasting short-term price movements based on current house prices, take a look at House prices now at 2003 levels and What the next year holds for house prices.

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