Sunday 14 October 2012

A Comparison of UK House Prices (Formerly The Greater Fool UK House Price Index) – October 2012 Update

This is the monthly update that compares the various UK House Price Indices.  The previous update can be found here.  Since the last post I have engaged in some good debate with Retirement Investing Today readers which has then encouraged me to undertake some further reading around this topic.  This has resulted in this regular topic seeing a number of direction changes which you will notice as you read on.  The first of these is that from here on in this regular post will not be referred to as the Greater Fool Index.  This title encouraged emotion and an inherent bias.  This blog is not about either of those things and so I must drive the title back to one that is emotionless and mechanical.  Not quite as exciting I know but hopefully of more use for making the right investing decisions moving forward.

It’s also important to note that this topic is also a work in progress and is not yet mature.  Therefore as you’ve already done previously please feel free to comment on the analysis so that we can further improve the data for all readers.

Let us first look at the five datasets that will be used for ongoing analysis:
  • The Rightmove House Price Index.  This index simply tracks the average asking prices of properties as they come onto the market.  This means it will be affected by price changes, if the mix of house type changes and if the mix of location changes for houses coming onto the market.  It is not seasonally adjusted and covers properties from England and Wales.  Asking prices in September were £234,858 which month on month is a fall of 0.6% and year on year is an increase of 0.7%.
  • The Acadametrics House Price Index.  This index is new for this blog and uses the Land Registry dataset.  It mix adjusts this dataset to take a constant proportion of property types, from a constant mix of geographic areas.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  Buying prices in September were £225,374 which month on month is a small fall of 0.1% and year on year is an increase of 2.2%.
  • The Halifax House Price Index.  This index is based on buying prices of houses where loan approvals are agreed by Halifax Bank of Scotland.  It uses hedonic regression to remove type and mix variations thereby measuring the price of a standardised house.  I use the non seasonally adjusted dataset and it covers the complete United Kingdom.  Sales prices in September were £160,437 which month on month is a rise of 0.2% and year on year is a fall of 1.2%. 
  • The Nationwide House Price Index.  This index is very similar to that of the Halifax except it is based on buying prices of houses where loan approvals are agreed by Nationwide Building Society.  Sales prices in July were £163,964 which month on month is a fall of 0.5% and year on year is a fall of 1.4%. 
  • The Land Registry House Price Index.  This index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  This is then combined with a mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  Sales prices in August were £163,376 which month on month shows no movement and year on year is an increase of 0.7%. 

It is important to note that all of these price changes show nominal changes.  If we correct for the devaluation of sterling through inflation then we see a very different picture.

There is a timing shift between these five indices which we must also consider.  Firstly, a house is placed on the market for the first time (the Rightmove Index).  Secondly, somebody possibly buys the house using a mortgage (the Nationwide and Halifax Index).  Finally, the purchase is registered with the Land Registry (the Land Registry and Academetrics Index).  The best estimate of this timing shift is shown in the chart below which is taken from the paper by Robert Wood entitled A Comparison of UK Residential House Price Indices


Click to enlarge

The chart below then shows an overlay of all the indices incorporating this timing shift.  It uses the Land Registry/Academetrics house prices as the baseline date.  I then average the Nationwide and Halifax house prices in an attempt to increase the accuracy of these datasets and move the data forward by 3 months as that phase occurs 3 months before the Land Registry.  I then also shift the Rightmove house prices forward 6 months as that phase occurs 6 months before the Land Registry.  By doing this we should be able to fairly compare each of the indices with each other as we should be comparing the houses and prices from approximately the same period.

Click to enlarge
The chart below then shows a selection of these datasets converted into three indices.  The first is the ratio of the Halifax-Nationwide datasets to the Land Registry (the red line).  The second is the ratio of the Rightmove dataset to the Land Registry (the blue line).  The third is the ratio of the Rightmove dataset to Academetrics.

Click to enlarge

So what does all this tell us?  Unfortunately I think is going to take a few months of data analysis to get a proper handle on.  My initial thoughts:
  • I can’t help but feel that the Rightmove Index is just about useless.  It doesn’t tell us what is happening to house prices as it only covers asking prices plus it can be skewed by location and property type mix variations month to month.  The Rightmove to Land Registry Ratio is at 1.43 (ie the Rightmove Average Price is 43% above that of the Land Registry.  This ratio was as low as 1.13 in 2004.  I was originally suggesting that Average Rightmove sellers were over pricing their properties by 43% (and hence waiting for the Greater Fool) however the further analysis shown today also indicates that it could be simply a change in sales mix.
  • The Academetrics dataset is only around 2.8% below nominal peak where the Nationwide/Halifax Average (HaliWide) is down by 15.7%.  There are 2 big differences here.  The first is that the HaliWide covers all of the UK where the Academetrics only covers England and Wales.  Now we know that Northern Ireland has seen big falls already so as an England based person are the falls here less than the HaliWide would suggest?  The second is that the mortgage providers require a surveyor’s valuation which should ensure “fair current” value is paid where Academetrics includes cash buyers who could be over paying?
  • The Land Registry (which is England and Wales only also) contradicts this a little by ending up in the mid ground by suggesting a fall from peak of 10.4%.

Unfortunately all the additional research has probably raised more questions than it’s answered.  So when I eventually start looking to buy a house what Index should I be using to work out how much I should be paying (offering?) by taking the previously sold price of the house and correcting for the Index change over that period?  I think today’s analysis definitely rules out Rightmove.  As for the others I think the jury is still out also.  The HaliWide is possibly over stating the falls because of the inclusion of Northern Ireland.  The Land Registry/Academetrics is possibly understating because of the possible cash buyer effect. 

I guess I have a while to figure it out as houses to me are still way over valued.  Your opinions/thoughts are welcomed as it may get us through the maze more quickly.

As always DYOR.

3 comments:

  1. Thanks for another great post, I agree the Rightmove index does not look informative.

    I have two questions:

    Firstly, in previous posts you have convincingly emphasised the importance of each individual's circumstances. Does this apply to the decision to buy or rent? One way to evaluate this decision is to compare the costs of buying and renting similar properties.

    If you do this, might the price and equivalent rent of the specific home you are thinking of buying be more important than the average house price? For example, if a house had a motivated seller and so had lower costs (inc. opportunity cost of your capital) than renting a comparable home, would you still avoid buying because the market as a whole was overvalued?

    In previous posts you've expressed skepticism about "timing the market", does this apply to the housing market? I presume you are not looking to speculate on house price appreciation, but buy a home to live in for many years. In which case are the future movements in house prices that important? Aren't the benefits you will derive from a home are essentially the same regardless of its current value?

    Secondly, the price of a home is a function of the supply and demand in the local market for homes. If more homes are built in an area, prices are likely to be lower than if fewer homes are built. Are you lobbying your MP and Councillors to allow more building and development in areas you hope to live in? One of the consequences of the Localism act was to give more power to local people in planning decisions. Unfortunately, the most engaged local people tend to be those against further development (generally home owners). Those, like you, who would benefit from an increased supply of homes tend not to voice support of new development. But you could potentially decrease prices by lobbying your representatives to increase the supply of planning permissions for new homes.

    I would be most interested in your thoughts on this.

    P.s. I posted as anonymous 1 here: http://www.retirementinvestingtoday.com/2012/08/early-retirement-extreme-vs-early.html

    Conflict of interest: I am a home owner.

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  2. Hi asdasdasd

    Some good thoughts from you yet again and certainly food for thought.

    Regarding your first point. I'm definitely not looking to speculate that's for sure. When I do finally buy it will be a home for my family. Nothing more and nothing less. I think we come at these things from different directions which is great.

    For me I think of it as not so much the cost of buying vs renting but that every £ of capital is worth 4% or so real return per annum. I'm simply trying to maximise that capital and get it as fast as possible. If I could find a home that was fairly valued (ie a motivated seller) I'd be in boots and all. That's really what this post is about. When the opportunity arises I want to assess what the house has previously sold for over the years and then correct for this by what the market has done using the appropriate index. If it's fairly valued then I buy.

    You make a good point about market timing. Within my current Portfolio I have two types of activity going on. 1. Simple buy, hold and rebalance. 2. Tactical allocation via PE10's which if I'm honest with myself is a limited form of market timing.

    I think you are saying shouldn't I just follow 1 with my home purchase. Maybe I should however I am in no rush as my current rental is below that which my home would ultimately be costing me (which I think you already know). I think that might be the clincher around everyones circumstances are different. One option could be to hedge a little and follow 2 by buying an intermediate house followed by the home sometime on the future. What puts me off that idea is it's a pretty expensive business buying and selling a house.

    Re your 2nd point. Again a very interesting thought. I have tried "communicating" with my local MP on previous occasions. My problem was that my demographic is a very distinct minority where I live today and so it was clear by the responses that I was being ignored. I want very different things to the majority here and so am effectively ignored as to gain my vote he would lose many others.

    As I've mentioned in the past when I buy a home it will definitely not be in the area where I live now. You've now made me wonder if I could try communicating with the MP of the area where I may move to. I'm wondering if s/he would blank me as I'm not currenty a constituent. Could be worth a try to see the response.

    As usual some good debate. Thanks
    RIT

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  3. Hello
    we're discussing your chart on housepricecrash.co.uk (another emotive name for you!).

    http://www.housepricecrash.co.uk/forum/index.php?showtopic=183798&view=findpost&p=909161244

    I think 3 factors come into play to explain the apparent RM divergence:

    1. mix-adjustment - more downsizers putting there more expensive homes on the market, in this segment there are many kite-flyers (see 2).
    2. many houses purportedly for sale on RM are not close enough to the actual market to get offers - some houses languish for years unsold.
    3. sooner or later the increasing proportion of down-sizers (with homes priced higher than average) will skew the Halliwide indices upwards, irrespective of any mix adjustment they do. Ironically, they may bid up prices of the smaller places they buy too.

    As you know, you are comparing apples to oranges with these indices, but the vector is useful to gauge sentiment (or delusion).

    Interesting chart, thanks for putting it together,

    JustYield

    ReplyDelete