Nestors and Investors: Five ways to understand house price indices

UK house prices have now been falling since the second half of 2007. The reason we know that, other than from our own bitter experience if we have tried to sell, is via the publication of various house price indices. Are these indices accurate? Do they apply to my house and yours? Are they the same as share indices such as the FTSE 100? And do they apply to every property in the country?

The answer is no. Below are five pointers to understand how house price indices work:

1. There’s not just one price index. In fact there are several, including those of Nationwide, Halifax, and the UK Government. What each index tells you is just a summary of what is happening in that particular index, not what is happening to the price of your house. The Bank of England is acutely aware of “significant conceptual and practical problems” with using a single number to try and describe the price of every house in the country.

2. The long-term view. In January 2009 the Halifax index rose and the Nationwide fell; in March Halifax fell and Nationwide rose. They do tend to move together, but the main message is one of long, slow general trends, not micro changes on a monthly basis. An increase of one index in one month should not be seen as a green shoot, it is merely a blip, a statistical aberration, or in Gordon Brown’s infamous statement, an indicator of “an exogenous variable”.

3. Share indices are relatively easy to construct, as any ordinary share in (say) Barclays is totally identical to the millions of other shares in that bank; but with houses almost every one is different. So if we know the price of one Barclays Bank share we know the price of all of them, but the price of one house is not equal to all others.

4. Dual Investment. When buying a house you are in fact buying two distinct things; a housing service (a home to reside in) and also a fairly risky and volatile investment. The house price bubble that burst in Autumn 2007 hit the investment component of the price, but not the housing service. So like many other assets, the nesting part is still there, it’s the investing bit that’s suffering.

5. Bad news for flats. Using the Nationwide index, the South West region has fallen 19% since its peak in September 2007, a fall identical to the UK average, but worse that Scotland with a drop of only 14% (the UK’s best region) and much better than Northern Ireland where the drop of 40% makes it the UK’s worst region. Unfortunately it’s not just the regions that differ: there are different rates of price fall for detached, semi-detached, terraces and, dropping the fastest, for flats.

Dr Geoff Willcocks is Deputy Dean (Education) at the Business School.