Guide to House Price Indices

Introduction

The array of house price information can be mind-boggling. Whether it is Land Registry data, Home.co.uk's own Asking Price Index or latest statistics from mortgage lenders there is no shortage of information available.

The most common form of house price information used is to calculate the overall average price trends of a group of houses or region. But it must be remembered that this is just, "one of many plausible measures of the central tendency of house price appreciation for a particular group of properties." (Abraham and Schauman, 1991).

If taken with a degree of caution house price and asking price figures can be a useful indicator of trends in the market. But that is all they are, an indicator. No figures will be able to tell categorically how much an individual house is or will be worth, or by exactly how much the house price market will go up or down.

Another problem with house price information is that findings can often be wildly contradictory. While one set predicts a housing slump, on the same day another may say prices are static or going up. This guide aims to shed light on the main sets of house price figures (also known as house price indices), how those releasing the data come to their conclusions and the disadvantages and advantages of each method.

Summary of the Main House Price Indices

Methodology

The following section introduces the reader to the main methods used by the various house price indices. An understanding of the methodology will be useful when trying to understand the merits and shortcomings of the various indices.

Difficulties in Measurement

Measuring property prices differs from measuring the prices of other assets because the special characteristics of the housing market mean that both the choice of sample data and unit of analysis will have an impact on the index results:

• Houses are heterogeneous. No two properties are identical; they will invariably differ in location
• Prices are negotiable. The price of a property is not fixed and can change throughout the transaction process. This means that the we can only know a house's market value after it has been sold
• Property sales are infrequent. Only between 3 to 7 per cent of the housing stock changes hands every year - this means the average house is sold approximately every 14 years. As a consequence, available sales data for a certain property are on average 7 years old and consequently of limited use

Simple Average

The simple average of transaction prices is the mean price of all houses sold in a certain period of time. This method of analysis, used by Land Registry, is suitable for assessing the total value of turnover in the property market.

The main problem with this method is that it does not take into account differing transaction times for differently priced properties. If, for example, the number of sales of (more expensive) detached houses rises, the simple average will record an increase in property prices, although the prices of individual properties have not actually changed.

Therefore, the data must be standardised in order to neutralise the effect of variations in the sample data.

Hedonic Regression

The hedonic model of price measurement is based on the assumption that an asset's value derives from the value of its different characteristics. The price of a house will therefore depend on the value the buyer places on both qualitative (e.g. heating type) and quantitative attributes (e.g. number of bedrooms).

Since the prices of these characterictics cannot simply be observed, hedonic regression estimates the implicit market value of a unit of each attribute by comparing sample house prices with the associated characteristics (Thwaites and Wood, 2003).

Problems:

• The relevance of a certain characteristic to the value of a property cannot be assessed objectively
• It is often unclear how a certain attribute influences the price of a house
• Virtually all the attributes of a property that may affect its value have to be taken into account

Mix Adjustment

Mix Adjustment divides the property market into 'cells'. Each cell contains properties with similar characteristics in similar locations. House price data can then be allocated to the different cells in order to assess the average price of each cell, i.e. of properties with different characteristics. After the mean values have been weighted, the average cell price is the mix-adjusted price.

Problems:

• As noted in the discussion of the hedonic regression model, all property characteristics have to be taken into account to guarantee accuracy
• Differences in weighting can have a substantial effect on the outcome of the analysis

Repeat Sales

This method is popular in the United States. In contrast to the hedonic regression and the mix-adjustment methods, which use large numbers of property characteristics, the repeat sales model observes the price development of a specific house over a period of time. By observing the price developments in a number of houses during overlapping time periods, general inflation trends can be inducted.

Problems:

• Because the inflation rates of different property types (e.g. detached and terraced houses) might diverge, a shift in the sample data towards a certain property type can influence the estimated inflation rate. If, for example, the prices of detached houses rise by 5 per cent whereas the prices of terraced properties do not rise, a shift in the sample data towards detached houses will show a higher inflation because the characteristics are not taken into account
• This method also ignores whether a house changes in condition or is altered, such changes will affect value and thus the index

Seasonal Adjustment

This takes into account seasonal variations in the property market to give a more accurate picture as to whether prices are moving up or down. It also enables better comparison with sales at the same time of year over a number of years.

It is important to take into account seasonal variations as otherwise house price figures can be misleading. House sales traditionally drop off at Christmas time and pick up again in the Spring.

Seasonal adjustment is often calculated using a technique called classical seasonal decomposition, which is also known as ratio to moving average. In essence this isolates seasonal variables and recalculates house price figures taking these into account. There is a variety of seasonal adjustment software on the market that can carry out this recalculation process. One that is commonly used, by amongst others the UK Government, is the US software X-12-ARIMA.

The "Average" House Price

A house price index represents a certain 'typical' house or set of houses. The problem that arises is how to choose or define the 'typical' house. This can be done in one of two ways: according to number of transactions; or according to stock of properties. The two will vary because some property types change hands more frequently than others.

The other problem that arises is the issue of weighting. There are two possible approaches:

• Transaction Weighting or Volume Weighting. An index based on transaction weighting represents the price of a house with 'typical' characteristics; all the properties in the set have an equal weight in determining what is 'typical', irrespective of their price. This method is used when the index is constructed to represent the value of a typical member of the reference set
• Expenditure Weighting. Using expenditure weighting, an index embodies the price of a representative set of properties, and the more expensive houses have a higher weight. This method is used when the price index is constructed to reflect the value of the housing stock

References:

• Gregory Thwaites and Rob Wood, "The Measurement of House Prices" (Bank of England Quarterly Bulletin, Spring 2003)
• Simon Briscoe, "House Price Indices" (Significance, March 2004)

Home.co.uk Asking Price Index

The Data

Home.co.uk publishes its monthly Asking Price Index, which is compiled using asking prices from more than 700,000 properties, the majority of homes for sale in the UK. Properties above £1m and below £20,000 are removed from the calculations to avoid skewing the figures. Information, which is supplied by property market research and data firms, includes regional variations, comparisons between asking prices month to month and over longer periods including three months and a year.

The Method

To compile Home.co.uk's Asking Price Index Landmark Analytics (formerly Calnea Analytics) uses a weighting system, which is based in the Government's Survey of English Housing Stock (published March 2006), which allows for a regional breakdown of the figures. The Bank of England estimates that asking price data is around six months ahead of HM Land Registry data and three to four months ahead of mortgage approval data (Halifax and Nationwide).

Disadvantages

• Data based on asking prices rather than actual completed sales, information should be used as an indicator of how the property market is likely to perform over the coming months rather than as an accurate reflection of how much homes actually sell for
• Auction properties not included
• Not seasonally adjusted

Advantages

• Because it is based on asking prices it provides a current snapshot of property market sentiment and is therefore a key forward indicator as to how market transactions will perform over the coming months
• Unlike surveys provided by building societies and professional organisations the survey is independent
• The Home Asking Price Index is compiled from the largest monthly dataset available
• Takes into account price reductions whilst on the market

Verdict

A robust piece of research which provides a useful indicator of the way the housing market is heading over the coming months.

LSL Acadata England and Wales House Price Index

Summary

LSL Property Services plc has released a monthly UK house price index since 2010, when it took over the publication of house price data compiled by research and analysis firm Acadata. This had previously been released by the Financial Times as the Financial Times House Price Index. Acadata refer to its index as the "index of indices" as it is developed from a raft of sources.

The Data

The "index of indices" model used by Acadata was first developed in 2002 by Dr Stephen Satchell, from the University of Cambridge, and Dr George Christodoulakis, who was then at City University. Land Registry data on final prices for sold properties is the main source of data used by Acadata but as only around 35% of sales are reported to the Land Registry the research firm also uses data from The Office of National Statistics, Nationwide, Halifax, Rightmove and Zoopla. Separate Scotland and Wales only house price indices are also released each month.

The Method

The LSL Acad E&W HPI and its Scotland and Wales indices are adjusted seasonally and use mean-variance quadratic optimisation in order to produce the optimal forecast weights. The starting point is the Land Registry data, and each of the other indices is taken as a forecast of the Land Registry reports. Each monthly release updates the previous two month's releases to include all transactions over that period. This enhances the accuracy over a two-month period so that for example December's house price index will include what Acadata labels a "final, definitive" result for October.

Disadvantages

• It is only as robust as the figures it collects. Some will be out of date and take time to filter through, such as final transaction data from the Land Registry. Others, such as those from mortgage lenders, do not include transactions without a mortgage

Advantages

• This is a useful indicator of the state of the house price market as it combines the accuracy of the Land Registry with up to date figures from mortgage lenders
• The index also ensures that factors such as size of a house, local variations and seasonal differences in the property market are taken into account

Verdict

The Acadata index of indices model is a useful way of resolving disputes between the other major house price indices. Its monthly updating of figures as house price information becomes available potentially put it among the most accurate house price indices.

Halifax House Price Index

Summary

The UK's largest mortgage provider Halifax, which is part of the HBOS plc group, produces its monthly Halifax House Price Index. This includes data on the average house price, regional average house prices, month on month differences, quarterly changes and comparisons with the same month the previous year.

It is based on a monthly sample of its mortgage transactions, and typically covers around 15,000 house purchases each month, around a quarter of all mortgages. Because its figures are from its own customers it also has details of whether buyers are first time buyers. This more detailed buyer information along with regional breakdowns is released quarterly. The mortgage transactions included in the index are those that were approved rather than completed during each month.

The Data

The Halifax uses its own database of approximately 300,000 mortgage approvals per annum (ca. 25 per cent of all mortgages) as a basis for its monthly house price reports. Because it uses approved loans rather than completed mortgages, the Halifax can obtain data earlier than the Land Registry. The Halifax index excludes property sales that are not for private occupation and those that are likely to have been sold at prices which may not represent 'free' or 'normal' market prices, e.g council house sales and sales to sitting tenants.

The Method

The Halifax index uses the hedonic regression model to estimate the price of the 'typical' house, not the 'average' house price. The typical house has the mean characteristics of the properties on which Halifax approved mortgages in 1983. The price data for the various house characteristics are estimated by hedonic regression separately for every period; thus, relative prices of the characteristics are free to vary. The Halifax data is seasonally adjusted on a monthly basis and weighted according to volume.

Disadvantages

• Its focus on mortgage approvals rather than completed deals means it can never be wholly accurate as some deals may fall through just before completion
• It only covers a sector of the market as it is restricted to its own customers
• Because it is based on mortgages it ignores any cash purchases of property
• Using the characteristics of a typical house in 1983 as a starting base for the index means the figures will always be skewed. Much has changed in the property market since then, with crashes and massive inflation of prices. Also at the time Halifax had a far stronger base of customers in the North of England

Advantages

• Because it covers mortgage approvals it is more up to date than figures based only on completed deals, which can take a number of months to collate

Verdict

The Halifax index concerns the price of a typically transacted house rather than the price of a typical house in the property stock. It is useful because of its timeliness, but the possibility of sample errors and its Northern bias should be kept in mind.

Nationwide Building Society's House Price Index

Summary

The UK's second largest mortgage provider, the Nationwide Building Society, produces its own Nationwide House Price Index. This is mix adjusted, taking into account characteristics of properties sold over time and is also seasonally adjusted, to take into account traditional strong and weak months for the housing market. It is similar to figures produced by rival mortgage provider, the Halifax, as it is based on its own mortgage transactions at the approval stage, rather than at completion. Nationwide says that any regional bias in its house price figures due to its larger customer base in the south east of England are ironed out through the process of being mix adjusted.

The Data

Nationwide bases its index on its own mortgage approvals. Unlike Halifax, however, it covers only 10% of the mortgage market. Nationwide only takes into account owner occupied properties and houses sold at "true market prices", i.e. no council estate sales etc. Nationwide has been publishing quarterly property price reports since 1952, and monthly indices since 1993. Like the Halifax, this is a volume-weighted index of typically transacted house prices.

The Method

Nationwide states that it uses mix-adjustment, yet in fact its methodology is very similar to the Halifax and also uses the hedonic regression model. It estimates the price of a 'typical' house in relation to various characteristics; yet, the Nationwide definition of the 'typical' house is revised every year. Nationwide also revises its regional weighting in accordance with rolling averages from HM Land Registry, Department of Communities and Local Government as well as its own mortgage approval data.

Disadvantages

• As with the Halifax's figures the Nationwide's focus on mortgage approvals rather than completed deals means it can never be wholly accurate as some deals may fall through just before completion
• It is only a snapshot of the market as it is restricted to its own customers. Nationwide also has a relatively smaller customer base, accounting for just 10% of the market
• Its starting point of 1993 is more up to date than Halifax's figures but is still a little out of date

Advantages

• As it is based on mortgages approved it can provide more up to date information than figures based on completion, which can take months
• Its average house price will be more accurate than Halifax's as it has 1993 information rather than 1983 information as a starting point

Verdict

Like the Halifax index, the Nationwide house price index concerns the price of a typically transacted property; its main advantage is its timeliness, the main disadvantage data inaccuracy.

Rightmove's House Price Index

Summary

Launched in 2000 Rightmove was created as an online property advertising website by some of the UK's largest property and financial firms, including HBOS, Countrywide Assured and Royal & Sun Alliance. In 2006 it became a public limited company (PLC) and its original founders retain around 80% of its shares. It contains listings from around 10,000 estate agent branches, accounting for around 60 per cent of the agency market. In 2002 it launched its monthly house price index. This is based on the asking prices registered on its website. Data available is broken down by region, council area and house type.

The Data

The Rightmove index is based upon sellers' asking prices as posted on the Rightmove website. Actual figures are not available nor are they verified by a third party. However, Rightmove claims that about 90 percent of all properties on sale are advertised on its website. It would appear that only properties which are new on the market in any given month are used in the calculation thereby ignoring price changes of properties already on the market.

The Method

Rightmove claims to use the mix-adjustment standardisation method although little information is available on how this is applied. The Rightmove index does not adjust the data to seasonal changes.

Disadvantages

• The volatility of the Rightmove index means the figures often vary wildly from month to month and therefore cannot present an accurate picture of the housing market over the short term
• By basing its findings on initial asking prices it ignores reductions in prices that sellers subsequently make and can therefore present an over-optimistic outlook
• The higher price of initial asking prices compared to actual transaction prices also means that Rightmove's average house price figures can often be tens of thousands of pounds more than house price figures released by those such as The Land Registry
• Smaller dataset than the Home.co.uk Asking Price Index

Advantages

• By compiling asking prices it provides a more up to date snapshot of house prices than those figures that are based on transactions
• It has an advantage over house prices released by mortgage lenders, whose figures are only based on transactions involving mortgages. It is estimated that around a quarter of homes are not purchased with a mortgage

Verdict

Because of the way it uses asking price data, the Rightmove index could be the first to track changes in the property market. However, since the data is not very reliable, the index is not useful as an early trend indicator as monthly changes are too erratic.

Zoopla UK Cities House Price Index

Summary

Zoopla's UK Cities House Price Index looks at property price movements in 20 UK cities. These localised, urban indices were initially created in 2002 by Hometrack for use in its wider property market research but had remained unpublished until October 2014. In 2019 the Hometrack UK Cities House Price Index was rebranded as the Zoopla UK Cities House Price Index. This followed Zoopla Property Group's purchase of Hometrack in 2017.

The Data

The Zoopla UK Cities House Price Index is updated monthly and also gives quarterly and annual changes for the 20 UK cities it covers. Each month it details the cities with the highest and lowest house price growth as well as offering city averages for the UK and a regional breakdown. For its figures for London it includes the immediate commuter areas outside of the capital's 33 Boroughs. In total 44 council areas are included in Zoopla's broader definition of London.

The Method

Zoopla's UK Cities House Price Index is based on repeat sales methodology and uses Land Registry data to look at the changing value of specific properties over a period of time. This is based on the price paid for a property rather than asking price. There are no seasonal adjustment or revisions based on inflation, however there is weighting according to the volume of private housing stock in each area. Monthly data is revised each month as more house price sale data becomes available. The base date for applying revisions to the average price has been set at December 2013.

Disadvantages

• The repeat sales method does not take into account the inflation rates of different types of housing. It also does not take into account changes to a property such as structural work or its condition, which can also influence value
• By focusing on cities it only tells half the story about house price changes in the UK, ignoring trends in rural areas and towns. In total less than 5% of land in the UK is covered in the Zoopla UK Cities House Price Index
• By being based on actual sales the figures can be out of date as it can take months for sales to be completed and for the data to be processed by the Land Registry

Advantages

• While Zoopla concedes the land area of its UK Cities House Price Index is small it argues that it covers more than 40% of the value of UK housing

Verdict

The Zoopla UK Cities House Price Index is an interesting addition to the array of house price indices through its unique focus on urban property market trends. However, by ignoring rural and smaller urban areas it offers just a snap shot of the UK property market.

Royal Institution Of Chartered Surveyors (RICS) Housing Market Survey

Summary

The Royal Institution of Chartered Surveyors (RICS) is the professional regulatory body for chartered surveyors, operating in 146 countries with over 40,000 members. Each month the Royal Institution of Chartered Surveyors (RICS) publishes a survey of chartered surveyors about house prices and housing stock across England and Wales.

The Data

Around 285 chartered surveyors take part in this survey, which asks whether prices have risen, fallen or not changed over the previous three months. Other information given in the survey is the number of homes on chartered surveyors' books and the number of completed sales.

The Method

An adjusted balance figure of the percentage of chartered surveyors who think there has been a rise or fall, calculated by subtracting those reporting a fall from those reporting a rise is then given. Figures are also available in a seasonally adjusted format.

Disadvantages

• This only gives a figure on the number of chartered surveyors who think house prices are moving up, down or staying put. It doesn't give an indicator of how much house prices are worth or by how much prices are falling or rising and therefore only shows part of the picture of the housing market
• It is based on chartered surveyors' opinion, which is difficult to verify, rather than firm facts about prices

Advantages

• The RICS Housing Market Survey gives a valuable indication of how the house price market is changing by asking questions directly to chartered surveyors, a key profession in the property market
• By asking about housing stock and completed deals the RICS Housing Market Survey offers an insight into the number of properties coming onto the market and how quickly they are selling
• One of the most timely forward indicators

Verdict

These are some of the figures most respected by leading economists and are frequently cited as a reference by the Bank Of England's Monetary Committee, which sets interest rates.

The UK House Price Index

Summary

The UK House Price Index (UKHPI) was created in 2016 to bring together the UK government's various residential property sales data as a way of offering consumers and the housing industry a clearer picture of latest house price trends. Prior to the creation of the UKHPI both the Land Registry and ONS produced their own regular house price indices.

The Data

Fed into the UKHPI is official government data from the England and Wales focused Land Registry, Registers of Scotland, Land and Property Services Northern Ireland and is calculated by the Office of National Statistics (ONS). The range of data covers completed residential housing transactions, whether for cash or with a mortgage. Data is available nationally, regionally as well as at a county and council level. The index is published monthly, with data for Northern Ireland updated quarterly.

The Method

A hedonic regression methodology is used. This factors in a variety of property attributes as well as demographic characteristics of location to produce estimates on changes in local house prices. To help calculate the demographic characteristics of areas the UKHPI uses geo-demographic segmentation through the ACORN classification, which is produced and licensed by CACI Ltd. This offers a postcode specific analysis of local social factors and behaviour.

Disadvantages

• Characteristics measured in the hedonic regression model are subjective and it is not often clear how certain attributes influence house prices
• By focusing on house purchase data the figures can be out of date as it can take months for sales to be completed and data to be processed
• Repossessions and sales at auctions are not included as they are considered commercial transactions

Advantages

• With access to all UK non-commercial property transactions as well as mortgage completions, the UKHPI offers a comprehensive and accurate picture of house price trends across the UK
• By combining this wide range of official UK housing market data it offers greater clarity
• The data is well presented with an easy to use search tool to appeal to the general public, as well as more detailed information available for housing professionals

Verdict

In terms of pinpointing latest trends, the UKHPI's focus on completed cash and mortgage sales means it will always lag behind other indices that focus on asking prices and mortgage approvals. Nevertheless, with such a wide range of accurate sales data, it is reliable, factually accurate and offers an excellent range of information to the public and experts alike. This bringing together of a variety of official data sources also helps avoid confusion.

Reallymoving House Price Forecast

Reallymoving is a provider of quotes for home moving services online. This includes quotes for conveyancing. It uses information supplied by buyers on their conveyancing quote forms to measure house prices each month through the reallymoving House Price Forecast.

The Data

House price analysis is based on an average of 6,069 monthly conveyancing quotes. This is gathered for England and Wales as a whole, as well as a regional basis for the English regions, Northern Ireland and Scotland. It is presented in graph form comparing three sets of figures. This includes reallymoving price data together with a longer term forecast for prices over the coming three months. These are then compared to Land Registry Price Data. Customers submitting house price information to reallymoving tend to get quotes 12 weeks before completion. Reallymoving has recorded a close correlation between its figures, on house prices based on conveyancing quotes, and those relating to actual prices paid published by the Land Registry.

The Method

The data is both seasonally and mix-adjusted based on the time of year, type of property, leasehold/freehold and whether the property is a new build or an existing home. Data included is for properties priced between £40,000 and £2,000,000. This helps reallymoving account for any pricing errors on the conveyancing quote forms. Reallymoving also takes into account potential skewing of the data towards the lower-priced end of the market, due to the profile of customers using a price comparison site. As a result forecasted values have been lifted by the average difference between reallymoving and Land Registry data during the previous quarter.

Disadvantages

• The number of observations at around 6,000 is low compared to other house price indices
• The figures are not based on actual prices paid and rely on buyers submitting accurate data about the value of their new home. House prices may also change during the conveyancing period

Advantages

• By gathering house price information around three months before completion, reallymoving's house price forecast offers an insight into what paid-for prices could look like in the coming months
• The information is well presented in easy to read graphs, with useful comparison information and a forecast of prices over the next three months

Verdict

Reallymoving's house price forecast offers a useful snapshot of how house prices may change over the coming three months. Its monthly release of house price figures, comparison with Land Registry figures and forecast of prices for the next three months is a useful addition to the house price indices available.

Department Of Communities And Local Government House Price Index

Please note: The responsibility for this house price index was handed over from the DCLG to the ONS in 2012.

Summary

The Department of Communities and Local Government House Price Index is frequently referred to in the media as "the government's official house price figures". It is these figures, along with the Land Registry's that the Government uses to identify house price changes, areas of high and low demand and housing affordability. This helps to determine economic regeneration as well as housing policies such as housing affordability.

The Data

The Department of Communities and Local Government (DCLG), publishes an 'experimental' monthly statistical release of latest house prices and house price inflation called the House Price Index. This is based on data on completed sales submitted from the Regulated Mortgage Survey (RMS) of the Council of Mortgage Lenders Bank Search. This involves around 50 mortgage lenders and includes around 45,000 completed sales each month.

The Method

The report uses a mix-adjusted technique to determine an average house price nationally and regionally. The House Price Index, which is usually available on the second Monday of each month, also includes information about the type of buyer, for example first time buyers. Additionally it provides a seasonally adjusted update on the figures a month later, that takes into account traditional good and bad times of the year for property sales.

Disadvantages

• Because it is based on mortgage completions, which may be months after an offer is accepted, the information can be several months out of date
• The seasonally adjusted version is even more out of date, taking a further month to compile
• Experimental methodology

Advantages

• This appears a fairly robust set of figures based on mortgage completion information from the Regulated Mortgage Survey, which includes information about types of buyers, such as first time buyers
• It also provides a seasonally adjusted version, which gives a better year on year comparison
• Mortgage completion data tends to be more accurate than mortgage approval data

Verdict

This is an experimental index that tends to give an optimistic picture of the market. Its information can also be out of date as it is based on completed mortgage deals, which can take months to process. Nevertheless it is still a useful addition to the wealth of information about house prices.