A Better Way To Assess The Housing Market

We have house price indices all over the place and now we have one with a completely new methodology. Will it help us predict the future?

It seems unfair really. The Halifax and Nationwide have worked hard on producing their own indices based on house characteristics and on mortgages, and now along comes the Land Registry, with its huge database of house prices.

The Land Register is the world's largest property database, with over 20 million titles used to guarantee ownership of property. The Land Registry will produce an index from this, which will be seasonally-adjusted just like Halifax's and Nationwide's, so that it follows the underlying market trend and smoothes out seasonal variances such as the spring and summer highs.

The data used by the Registry goes back to April 2000 and it contains details of more than seven million sales. Of these, 1.3 million are repeat sales so this means that the Land Registry will be able to look at past and present sale prices of the same property. It will be the first index to do this and it will be published each month, unlike the current quarterly index the Land Registry also produces.

The methodology should mean that the Land Registry's new index is more accurate, although all property indices have flaws. With the Halifax and Nationwide for example, changes in the quality of the buildings aren't easily taken into account; consider if lots of properties have fitted kitchens added in the next few years; this might be reflected as house-price inflation, when actually it's just that the quality of the average house has improved.

On the other hand, the Land Registry's methodology causes problems if, for example, detached and terraced houses appreciate at different rates. One type of property may not increase at all, but the overall average drags it up the index.

Still, we have to consider: what precisely are house price indices for? One view is that it can be used to predict future prices, but this can be dangerous. Even Mervyn King, the governor of the Bank of England, says that he can't predict short-term house price changes. You can't look at last month's data and see from that where house prices are headed. Even if prices have gone up over a prolonged period, who can say they won't turn down? Not King. And not me either.

My view is that indices are most useful to people like you and me as a comfort blanket. While the short-term movements they show have little value, they do show that the housing market, like any other market, has tended to rise over time.

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