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Mortgage Strategy: The price of obsession

Mon 25 Mar 2013

The Price of Obsession

House prices are a compulsion and it seems that while national statistcs are an important pointer towards the bigger price picture, there is no subsititute for local knowledge such as surveyors or estate agents

House prices, horse meat and Hugo Chavez. Three topics likely to be at the top of many current news bulletins though the latter two will soon become chip paper.

On the other hand, house prices data, and the indices used to compile them, are a national obsession, and likely to be still lead bulletins and newspapers for many years.

But do these statistics from Halifax, Nationwide, the Land Registry, Rightmove and an increasing number of firms wanting to get their name on the front page of the Daily Mail or Daily Express mean much to the average broker and his or her client?

Prices can fluctuate wildly from one street to another so what good are national or regional measurements to the average broker and his or her client who simply want to know changes in a relatively small area?

If you followed house price trends in the national newspapers, then youd see a regular change in headlines, which often resemble a yo-yo as they bounce from joy to despair (depending on whether you want a crash or a rise).

Some of the most recent data show house prices were up 1.9 per cent over the past year according to Halifax to reach an average of 163,600. In contrast, Nationwides most recent index showed values stable over the past 12 months at an average 162,640.

Stats like this are only useful to a client if they are more area focussed as national stats do not reflect local issues that really interest the home-buying public, says Coreco director Andrew Montlake.

Also, regions vary so dramatically these days with variations between postcodes and, in places like London, even getting down to street level as other factors such as school catchment areas come into play.

Local Knowledge VS The Bigger Picture

John Charcols senior technical manager Ray Boulger makes the point that while national figures are important for policy makers in providing macro information, it is no substitute for local knowledge at an individual level.

Even the quarterly regional figures dont drill down far enough to provide local information, he says. Of course, the compilers of housing data do not have it easy. Breaking statistics down to street level may be possible in Vatican City, but in a country the size of the UK, it is a tad more difficult for firms.

Therefore, borrowers may need to find other sources of data to find local trends.

Many point to estate agents and surveyors as being much better placed to provide local trends.

While they may have a vested interest at times to over-promote the market to get the selling price up, a good agent is likely to have the detailed knowledge of an area where a buyer or seller wants a genuine feel for how the local market is performing.

However, agents wont know everything as some may specialise is a particular part of the market, such as high net worth properties.

Localised data on what has sold in the last year and the price ranges for sales tell you where the market has been working and agents are best placed to advise on the latest trends locally but different agents cover different parts of the market, says Hometrack director of research Richard Donnell.

Donnell also points out that brokers trying to help their clients find key housing data in their area should think of simple house prices data as just one measure.

In addition, they should consider the time it takes to sell properties in the area, the percentage of asking prices achieved and the supply and demand ratio.

Take the issue of how long a property has been on the market the more time it has been available the greater the buyers opportunity to knock a few thousand pounds off the price.

There are also many web tools that brokers and their clients can utilise. Websites such as and show how much properties in virtually any street or postcode in the UK sold for over the past few years. shows which properties in an area have recently dropped asking prices and by how much, while gives a colour-coded look at average sold prices in a street or postcode.

Critics suggest another issue with house price indices in the current climate is even if they covered every part of the country in depth, the number of transactions is so low historically that the sample size is too small for them to have any real statistical significance.

It only takes a small number of properties to dive in value for an entire region to experience a perceived huge drop.

To highlight how low activity is, figures from the Council of Mortgage Lenders show that estimated gross mortgage lending stood at 142.5m last year, compared to almost 363m in 2007, at the peak of the market. The estimated 10.4bn figure in January was down three per cent on the same time last year.

In the current environment house price stats should be seen as nothing more than a rough guide, says Montlake.

The issue is that as transaction levels are down even a slight change can look more dramatic than it actually is. The negative points raised by the experts so far are not to say house price indices are worthless, rather that they should not be seen as the be all and end all.

Also, when brokers are discussing trends with their clients, they should bear in mind that local knowledge is likely to be far more useful to a borrower than pointing to any of the big statistical charts.

Where many see house price indices as being useful albeit when transaction numbers are high enough to make the sample sizes larger is in shaping macro economic trends.

This is rather like inflation figures. If the Retail Price Index measure is at 3.3 per cent, which it currently is, that does not mean the cost of living is rising by the same rate for everyone across the country. Some will be better off, some will be worse off, given it is based on a sample of everyday goods.

However, it is useful for policymakers such as the Bank of Englands Monetary Policy committee in setting the base rate, and for many other reasons, if nothing else, to give an indication of how the economy is performing. In the same way, house prices indices can give a good picture of the housing market.

National stats are a general guide to the overall health of the property market but need to be seen in the wider context, says Montlake.

Another key question is why does the market need so many indices? The Nationwide and Halifax indices, perhaps the most high profile, are based on the two lenders mortgage valuations, so not necessarily the sold price.

There are concerns the Halifax index is biased towards the North of England and Nationwide biased towards the South of the country, though both deny these charges. Another concern surrounds the volatility of month-by-month price changes, leading many to refer to the three-month-on-three month figures to be more accurate.

And there is more negativity. Boulger also questions why both lenders seasonally adjust their data to cancel out the fact prices tend to be higher in the warmer months due to reduced discounts as more buyers are hunting for properties. He says the seasonal adjustment skews the real figures so creating misleading figures because, quite simply, they are not the real data.

Meanwhile, Land Registry data is from all property sales, so the data should be more robust, though critics point to the fact many sales are not reported in time to be incorporated into the statistics. There can also be a lag of a few months because it is based on data at the point of sale, not when the mortgage is approved, which is normally the point the transaction can go ahead at the agreed price.

Apart from the lag built into the data, the index also takes longer to be published so what we see on announcement day is actually a look back at a few months earlier.

LSL Acadametrics uses a mixture of data from other indices and is therefore often referred to as the index of indices.

Then there is estate agent aggregator Rightmove which collates typical asking prices to give its indication of market sentiment, while the Hometrack survey asks agents a series of questions about whats happening in their area, such as time taken to sell and the percentage of asking price achieved.

There are more, but the fact it has already taken the best part of 300 words to describe the leading indices shows the size of this market.

Which house price index to trust

So which one should we believe the most given the average broker or client does not have the time to trawl through endless statistical bulletins?

The ones I like best are Nationwide and LSL Acadametrics, says Boulger.

Nationwide and Halifax are both early indicators as they are based on mortgage approvals and are released promptly after the end of the relevant period but Nationwides index is much less volatile than Halifax and hence I think more reliable.

In fact I dont think even {Halifax housing economist] Martin Ellis has much faith in the monthly Halifax data because for some time now he has been focussing his comments primarily on the three month moving average.

LSL Acadametrics index is based on by far the biggest sample of any of the indices, which is a big plus, and is reasonably timely, but the Nationwide figures for any given period are available quicker, and because they are based on mortgage offers, whereas LSL Acadametrics are based on completions, one has to factor in the timing differences.

Given there are so many indices, all displaying different types of data, it is no wonder experts all have different views as to the best.

Land registry can be argued to be the most relevant as it is actual fact rather than more speculative Nationwide or Halifax data, says Montlake. There needs to be a combined national index which takes everything in to account though I am not quite sure how you would do that.

Fluctuating Markets

As has already been mentioned, price trends can fluctuate wildly in different areas of the country, and none more so than in London, which has witnessed a huge influx of foreign money which has distorted the market in the capital.

Central London is a hive for foreign investment activity, with international investors representing over 60 per cent of the total buying population, reveals Naomi Heaton, CEO of property investment specialist London Central Portfolio.

Making up the largest proportion of our clients, at almost 40 per cent, Far Eastern buyers are a significant player in the London property market. In the past few years, more and more have taken advantage of beneficial exchange rates.

With the housing market still sluggish, partly due to rock-bottom interest rates which mean fewer people need to sell, the lack of supply is perhaps most keenly felt in the capital given the increased demand as a result of overseas interest, on top of the normal steam of local buyers.

Therefore, London has witnessed huge house price growth over the past few years.

Using Boulgers recommended Nationwide house price index, London saw the largest rises during 2012, up 0.7 per cent to give the capital an average price of 300,361.

Within England, the North/South divide in property prices continued to widen in 2012, with the price of a typical home in the South now around 95,000 more than in the North, a new high, and around 2 per cent more than at the close of 2011, Nationwide chief economist Robert Gardner.

Even within London, many estate agents point to numerous areas that were untouched by the UK-wide drop in house prices following the credit crunch.

In fact, the Nationwide house price calculator says a home in the capital worth 300,361 at the end of last year would have been worth 281,000 at the start of 2007, before the market began its downward spiral. Therefore, values in London, using that data, have risen by 7 per cent during those six years when, to many people, the overall market has bombed.

Whatever the best method is to assess house prices movement, it is important for many stakeholders, be it a lone borrower or the Government, to know how they are performing.

So which way next for this national obsession?

Muddying the Tea Leaves

Many point to falling rates on the back of the Governments Funding for Lending Scheme as having a potentially positive effect on demand this year, though for that to translate into a significant uplift in approvals, some of the mega-tight lending criteria will naturally need to be relaxed.

The unemployment rate is also getting better, which obviously means more potential borrowers are in work and therefore more likely to be able to afford a mortgage.

The National Association of Estate Agents says January saw a substantial uplift in its housing market activity during with demand reaching pre-recession levels and the number of first time buyers entering the market hitting a two year high.

It says agents saw an average of 282 house-hunter registrations per branch in December 2012, rising to 314 in January, the highest level in over five years Its not yet full steam ahead for the national housing market, but it is certainly building momentum, says estate agent Marsh & Parsons chief executive officer Peter Rollings.

Buyer demand is strengthening as we head into the typically busier spring period and an improved start to the year from the mortgage market, combined with greater confidence in the labour market, has helped remove some of the inertia in the national sales.

Research group Capital Economics says one effect of this uplift in confidence could be a modest revival in building activity during 2013, which would increase supply, if the group is proved correct.

Yet there are words of warning, in addition to the longstanding constraint of tight criteria wrapping its claws around the hopes of many mortgage-hunting clients.

In particular, any additional taxes on larger purchases could arrest the demand in London, where the most high net worth transactions take place.

But, in similar fashion to the contrasting output of the indices themselves, the senior executives behind the major housing data sources are split on their predictions.

Hometrack forecasts that house prices will drift lower again in 2013 by an average 1 per cent. Meanwhile, Ellis anticipates that we will see a national increase in house prices over the course of 2013.

Weak income growth and continuing below-trend economic growth, however, are likely to remain significant constraints on housing demand, he says.

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