Who Can You Trust On House Prices?

The leading house price indices are showing different rates of decline. They can't all be right.

I've long been of the opinion that you should treat the findings of all the various house price indices with the utmost caution. As has been highlighted on our property discussion boards recently, there is now quite a wide divergence between the figures they are showing for annual falls.

Those from the Halifax and Nationwide, the country's two biggest mortgage lenders, are showing the largest falls of over 10% but others are showing only a small decline or are basically flat.

The table below summarises the latest annual figures for the seven major house price indices.

Leading indicators

There are two main types of indices. Firstly there are leading indicators like Halifax and Nationwide which take their figures from mortgage approvals. There is also Rightmove, which is based on asking prices, and Hometrack, which is derived from what prices estate agents believe would be needed to sell a range of standard properties in their area.

While these give you early information, not all approvals will lead to transactions and the discounts achieved off asking prices will vary. So none of them are wholly reliable.

Lagging indicators

The second type of index is based on completed sales. These should be the most reliable figures, are they are based on actual transactions, however you would normally expect them to lag somewhere between one and three months behind the leading indicators. The FT, Land Registry and DCLG indices are examples of this type of index.

In the last few months, both the Nationwide and Halifax have been showing monthly declines of more than 1% and sometimes more than 2%. The monthly falls for the other indices have been a lot smaller, even if you adjust the fact some of them are a few months behind. This has created quite a gap with Nationwide and Halifax now showing annual falls of -10% to -13% while the two `estate agent' indices are around -5% and those based on completed sales range from 0% to -2%.

So who's right?

Part of the reason for the difference could be the biases inherent in the indices. The Nationwide and Halifax indices take information from their own mortgage approvals and now that the Halifax in particular is being more careful about its lending and taking a smaller percentage of the market than usual, this could be distorting its figures. Additionally, all the other indices include transactions which don't involve mortgages, which normally represent somewhere between a quarter and a fifth of all deals.

This is all speculation of course as we don't know enough detail behind these figures to see what's really happening. However, there's certainly something amiss.

You'd expect these indices to throw out mixed signals when house prices turn up and down so perhaps we shouldn't be surprised by the current situation. However, last time we had a reversal in house prices in the early 1990s, we only had the Halifax and Nationwide indices to look at so we were in blissful ignorance. Indeed, the proliferation of new house price indices in the last few years was probably the clearest signal that the housing market was overheating.

In time these differences should iron themselves out and in a few months we'll be able to compare the indices based on completions with the current leading indicators to get a better idea of what's happening.  Of course, if you're looking to buy or sell at the moment that's not much comfort. Personally, I suspect it's the Halifax and, to a lesser extent, the Nationwide indices that are ones out of kilter but that's little more than a barely educated guess.

In summary, we know that house prices are falling but we don't know how quickly. The fact there is such a wide variation between the indices, even if you adjust for the lag factor, suggests you certainly shouldn't take any one of them at face value.

More: I Want A House Price Crash!