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musehead

How House Price Indicies Are Calculated

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I've been reading about house prices today, and considering the amount of reading i've done over the last few years i'm surprised i've never realised this:

http://www.miac-acadametrics.co.uk/userfiles/file/MIACAcadametricsWebsiteHousePriceArticle.pdf

According to this, the actual mean of houses sold in Q2 2012 was £230k while the Halifax and NW indices were £167-169k due to a complicated "standardised" house calculation, which while showing house price inflation over time very accurately, does not accurately reflect actual selling prices. The same being true of the Land Registry figure - it does not reflect actual selling prices but rather the amount of house price inflation.

I've often seen it asked why the "delusion index" (the difference between Halifax/Nationwide and Rightmove) is so great, but surely this explains it?

The actual difference between Rightmove asking prices and the mean selling prices are not that great at all.

Perhaps these methodologies are well known, in which case I apologise!

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I've been reading about house prices today, and considering the amount of reading i've done over the last few years i'm surprised i've never realised this:

http://www.miac-acadametrics.co.uk/userfiles/file/MIACAcadametricsWebsiteHousePriceArticle.pdf

According to this, the actual mean of houses sold in Q2 2012 was £230k while the Halifax and NW indices were £167-169k due to a complicated "standardised" house calculation, which while showing house price inflation over time very accurately, does not accurately reflect actual selling prices. The same being true of the Land Registry figure - it does not reflect actual selling prices but rather the amount of house price inflation.

I've often seen it asked why the "delusion index" (the difference between Halifax/Nationwide and Rightmove) is so great, but surely this explains it?

The actual difference between Rightmove asking prices and the mean selling prices are not that great at all.

Perhaps these methodologies are well known, in which case I apologise!

This is very interesting read, thanks for the info. I would think that this would explain why Right Move index is so far away from the other indices. Now knowing a bit more how the other indices are calculated, it shows what LR, Halifax & NW are trying to show compared to what Right Move are indicating.

I never knew that NW & Halifax calculated the house price as "standard house", they should really publish what they think is the standard house and the standard bedroom cost.

Similarly surprised that LR does not actually based on actual house price sold on that year but more of house price inflation, but now to think about it again that probably make a lot more sense rather than Academetrics index.

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Yeah, the haliwide indexes are of agree mortgages, which may or may not proceed.

The land registry is of actual sale prices but doesn't contain new builds or auction properties.

They all seem biased one way or another....I'd trust none of them.

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The prices have to be "mix adjusted".

This is because few houses are selling, and most of those selling are relative high value houses from boomers selling houses back and forth between them.

There isn't currently an actual "market" so the figures have to be fudged to make them believable.

Without mix-adjusting everyone would realise that the housing market has stalled/collapsed and prices would plummet.

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I ran a post back in late 2012 that provided a succinct summary of the differences between the main house prices indices. If interested this is the link.

Ah that's a post, thanks and it explains a lot. I'm now convinced that what often quoted as the "delusion index" in this forum is non-sensical since it's comparing apples and oranges.

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Ah that's a post, thanks and it explains a lot. I'm now convinced that what often quoted as the "delusion index" in this forum is non-sensical since it's comparing apples and oranges.

Agreed. I initially bought into the delusion index but after plenty of research convinced myself that it just wasn't valid. Just too many variables all of which could be affecting the index.

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I ran a post back in late 2012 that provided a succinct summary of the differences between the main house prices indices. If interested this is the link.

Thanks, great post.

It seems a lot of people are not fully aware of the differences, and especially that NW/Halifax/LR don't reflect actual selling prices (rather, standardised to a figure which is a lot less than actual selling prices). The delusion index thread is full of people saying how it proves how crazy the housing market and asking prices have become, but the raw data from the LR that you used for your RIT index shows there is not much delusion at all.

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Thanks, great post.

It seems a lot of people are not fully aware of the differences, and especially that NW/Halifax/LR don't reflect actual selling prices (rather, standardised to a figure which is a lot less than actual selling prices). The delusion index thread is full of people saying how it proves how crazy the housing market and asking prices have become, but the raw data from the LR that you used for your RIT index shows there is not much delusion at all.

Glad you found it useful.

Just to clarify. LR does not use a standard house but instead uses repeat sales regression as I detailed.

Also be careful of the RIT indices. They're probably not far away from reality but the note added at the bottom of the post will certainly lead to some errors. Unfortunately at the analysis point I reached I ran out of brain power (little/no programming skills). I called for volunteers but no readers came forward so that regular series of posts which aimed to create a few meaningful non vested interest indices ground to a halt after that one.

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And you need the monthly adjustment ... Jan rises by 1k to say 101k so a 1% increase in prices, in Feb adjust the Jan figure back to 100k and a new Feb figure 101k of 1% for another rise of 1% ... rinse and repeat and by Dec you have had 12 months of headline grabbing 1% rise every month and prices are now ... 101k same as reported in Jan. The Land Registry are very good at doing this with IIRC 30 months of price adjustments that favoured HPI with 1 that did not.

A story I read the other day, although I can't find the link, bigged up LSL/Acadametrics as their indices also include cash-purchases, unlike Nationlied and Halfixed.

Here is their latest glorious data.

House prices hit a new record high, says Acadametrics

Friday 14th June 2013

House prices have shot up to their highest on record thanks to 'steroid' injections in the mortgage market, it was reported this morning.

The LSL/Acadametrics survey says house prices are now higher than at their previous peak of February 2008 and are £6,125 higher than a year ago at £233,061.

http://www.estateage...ys-Acadametrics

Also in DM of course. http://www.dailymail...ecord-high.html

Rightmove's survey collates asking prices for house prices place on its website over the previous month. However, it obviously does not reflect the prices at which properties actually sell.

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A story I read the other day, although I can't find the link, bigged up LSL/Acadametrics as their indices also include cash-purchases, unlike Nationlied and Halfixed.

Here is their latest glorious data.

http://www.estateage...ys-Acadametrics

Also in DM of course. http://www.dailymail...ecord-high.html

What I don't like about the Acadametrics dataset is the fact that it is calculated using an Arithmetic Mean (or Average). I don't like it because the housing market distribution has a very long tail to the right which is going to skew the "average". The LR may not be perfect but at least it uses a Geometric Mean which seems more appropriate for a dataset like UK housing.

Note: LR uses houses bought with both cash and mortgages. In fact the Acadametrics index uses the LR dataset (not index) as its basis.

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The LR may not be perfect but at least it uses a Geometric Mean which seems more appropriate for a dataset like UK housing.

And if you wish to buy a geometric mean averaged house and don't care whether it is in Neasden, Salford, Land's End or John O'Groats, the analysis suggests that house prices are static.

Meanwhile back in the real world, house prices are a local phenomenon. There is clearly a lot of work and careful thinking behind WICAO's analysis but for a given individual who must make essentially one investment decision once and then live with it, national aggregates are essentially irrelevant and nobody should ever forget that. You need to understand your local market. Anywhere outside London and the South East, sit on your hands and watch them fall. I suggest a bottom of 1997 prices rolled forward at a rate of 2% per annum over the intervening 16 years, i.e. what you could have bought in 1997 at £100k should be available today at £140k. And when I say should, I mean will, in due course.

What is baking my noodle is London and the South East. London appears to be sucking up flight capital from all over the world. It also just a plain fact that London has jobs and can attract naive young people to work all the hours that God sends in order to pay ludicrous rent on a sh!te shared flat in Putney. This is IMO an artefact of the ludicrous planning regime and the equally ludicrous devotion to neo-liberal economics which has facilitated an ungodly mixture of a concentration of jobs in London and the South East alongside a lack of adequate housing supply in London ad the South East, (I am still waiting for the market to solve the problem for these young fools, though I rather suspect that the market has already solved the problem and that the solution is that in real markets as opposed to idealised markets, there exist greater opportunities for rent seeking than Milton Friedman suggested...)

Nevertheless, for my money, the London bubble is still spent and essentially running on vapour, (and transaction volumes speak volumes). There have been some interesting arguments on the forum about flight capital. How large a loss should a foreign investor tolerate before they would have been better off paying their bribes and taking their chances with the local powers that be?

For my money the crucial point is that in order to sustain a bubble you must have an adequate supply of new entrants. As soon as London starts to slide this will reduce the flow of flight capital because for some of the international small fry, a modest negative price momentum in London will shift the calculus towards taking your chances with the keeping the money at home and not sending it off to Knight Frank in London. What is true of bubbles on the way up is true on the way down.

Long and short of it, indices are a complete waste of time. So much is aggregated that all the information is lost. Watching the aggregate indices for a heads up on what's coming is like strapping on waders and saying that you'll recognise revolution when your socks are soaked in blood. Find something fungible in your local area and watch the trend on that.

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Just look at rightmove house prices in postcodes such as b1-3 ,m1-3 and ls1-3 it is carnage! Sorting by date shows the hits that are being taken. Sort by price descending in any area north of Watford and nothing seems to be selling over 800k after 2010

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I didn't know this and wondered why the indices varied so much. I always assumed Halifax and Nationwide were the real indices and the the others made by VIs.

But this makes the bubble even worse in my eyes. £160k is 6+ times single earnings. £250k is 10 times!

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... national aggregates are essentially irrelevant and nobody should ever forget that. You need to understand your local market.

...

Long and short of it, indices are a complete waste of time. So much is aggregated that all the information is lost. Watching the aggregate indices for a heads up on what's coming is like strapping on waders and saying that you'll recognise revolution when your socks are soaked in blood. Find something fungible in your local area and watch the trend on that.

A thought provoking post there COTB. Let me clarify how am I using the indices and will use the indices when I eventually buy. Unlike many I don't restrict myself to a local area. I choose to live in the South East for now purely to maximise earnings after taxes/expenses. Additionally I'm saving very hard at 60% of gross earnings. This means I'll be financially independent in about 2.5 years from now and still only be in my mid-40's. At that time location is flexible as I won't be chasing the income which includes a few overseas options I'm exploring.

I only use the national aggregate as a macro indicator. I then move to a regional level to filter out nonsense like London. Having travelled through a fair bit of the UK I then break regions down to favoured counties and then to boroughs (if appropriate). That shows me where in the UK I have the best chance of getting value for money without having to trawl thousands of Rightmove entries. I can then get my favoured few and start analysing streets through Rightmove, nethouseprices, crime data, school data, things to do etc. If that all stacks up I'll pay a visit to the area. If that's a check then I'd move to the area for 6 months and rent If I'm still positive it's time to buy.

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  • 242 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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