House Price Indices: Seven Questions

House price indices are interesting again - at least they are to the wider public, looking at them to see if their home has increased in value.

But how should you read indices? I mean REALLY read them?

I was recently asked to present my thoughts on house price indices to about 150 landlords attending an extremely impressive seminar arranged by Finders Keepers, an independent lettings and property management agency with eight offices in Oxfordshire. 

The firm is the Sunday Times’ Lettings Agency of the Year award and featured in my Daily Telegraph Best Small Estate Agencies story early this year, and as part of its service to its client landlords it holds occasional debates, talks and networking sessions.

I won’t bore you with my presentation but the core of my message was this: it’s natural and useful to look at national sales and rentals indices but you need to do so after asking a series of questions. The answers to these questions explain why national indices vary and why they may actually have little direct relationship with your own local area.

The questions are:

What geography does the index cover? The indices vary - a lot. Some are all-UK, others are just England and Wales, and several are somewhere in between.

Who contributes the data? Is a particular index created by estate agents, or by mortgage lenders, by lettings agencies or by landlords? You can find this out by studying the methodology but once you know ‘who contributes’ you can get a picture of how close to the real market the index may be.

What point in the cycle does the index reflect? Some indices are drawn from mortgage offers, others use asking prices and rents, and others again are based on actual completions. Wishful-thinking sellers and over-ambitious estate agents suggesting high asking prices does not actually reflect the real market if buyers and tenants do not pay what they are asked.

What is the sample? Are there geographical areas or certain price sectors excluded from indices? (Yes, in many cases - again, examine the methodology which most indices put on their websites for details.)

How timely is the index? When a market is on the turn (as it is now, perhaps, from downturn to rising prices) an index talking about completed transactions - where the price was agreed by seller and buyer three months ago - may be out of date.

Why does the index exist? Few house price and lettings indices exist as a public service...most instead exist merely to publicise a company name or a sponsor, so may have data skewed to reflect the geographical area or demographic group to which that organisation appeals. That does not make an index wrong or biased - just not necessarily representative of where you live, own, buy or rent.

Finally, and crucially, ask the question - what about inflation? If you use a house price index as a guide to judge how your own home has risen or fallen in value, factor in the effect of inflation. This is not automatically factored in to an index so if the price of your home has risen from, say, £250,000 in 2006 to £265,000 today, don’t celebrate - inflation during that period actually means you are worse off now.

My audience in Oxford very patiently listened to a long version of this but will remember, I hope, my final message.

This was that house price indices are useful in indicating the ‘direction of travel’ of the general market but cannot reflect the subtle factors which influence house prices in regions, cities, neighbourhoods and even streets.

No matter what we say about lettings agents and estate agents, they are in fact best placed to know: so look at indices, by all means, but ask the questions I suggest to ensure the results are seen in the right context.

And then, speak to an agent 'on the ground'.

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