Incredible Indices

For some time the House Price Indices put out by the Estate Agents and Building Societies have been of questionable merit. For one thing they all focus attention on the Asking Price of houses rather than the Selling Price, when, in fact, it is only the latter, which is meaningful. What buyers want for their houses, and what they actually get for them when they sell are two completely different things. Even the BBC has carried a report showing that this difference on average is around 40%!!! But, looking at the latest indices even at Asking Prices, seems to show a glaring disparity with what you can see with your own eyes in the real world. Given that the indices are put out by the Estate Agents and Building Societies, both of whom have a vested interest in juicing the market, it would not be surprising to see them put out figures that flatter to deceive. In turn that makes the issuing of the indices a farce.

The BBC's Ian Pollock, wrote in December,

“For the past few years there has been a phenomenal gap between asking prices and actual selling prices.

The gap, depending on which measure of selling prices you use, has suggested that homes put up for sale by their deluded owners or estate agents have been as much as 40% over-priced.”

He quotes Housing Economist Johnathan Davis, who in the past has questioned the usefulness of the House Price data. The difference between Asking and Selling prices comes from the figures released by the Nationwide and Halifax, which show an average UK Asking Price of around £230,000, and the average selling prices of houses as recorded by the Land Registry, which shows an average UK House price of around £150,000!

But, even allowing for this stark variation, which is never brought out by the newspaper or TV News presenters, even the data on Asking Prices seems highly questionable. In their latest report, Rightmove say, the average asking price of a house increased by 0.4% during 2011. Even allowing for the distorting effects of London prices, this seems unsupportable as against what you can see all around . For example, in the West Midlands, prices are recorded as being down by just 7.9%. As someone who keeps a keen eye on what prices are doing, and benefiting from my wife who keeps an even keener eye on prices, this just doesn't seem at all realistic. I was looking at the possibility of buying an old terraced house recently. A number are coming up for auction, they have central heating and double glazing, and on offer for £20-25,000. That is a huge reduction compared with prices a few years ago, and yet a friend of mine tells me that even at these prices they are not selling at auction.

Rightmove have a response to this. They say,

“In areas where there is a lot of property up for sale, buyers are looking hard for properties that tempt them with something really special in terms of value, potential, location or quality of finish. If it doesn’t shout ‘special’ then they are unlikely to overpay for the privilege of buying an average property in these mortgage-constrained times. In locations where there is little stock for sale, they appear to have become online junkies, ready to pounce on fresh property coming to market to see if it will satisfy their housing need.”

The trouble being that there is plenty of evidence of all these “special” properties falling massively in price too! I live in a small village in a rural area near to the Shropshire border. There are only about a dozen properties in the village, and local planning controls prevent even extensions, that would enable additional residency, let alone any new houses being built. It is probably the most expensive area of Staffordshire to live. Most of the other people who live in the village are either current or former medium size business owners, company executives, university professors or lawyers. Many of the houses have their own tennis courts. The bloke who lives across the field from me recently traded in the helicopter he used to go to work in, and now settles for using his new Bentley.

I hasten to add, at this point, should anyone get the wrong idea, that the house I am renting, although it would not be cheap to buy, is probably the cheapest property in the village, by several orders of magnitude. The house opposite me came up for sale about six months ago, with an asking price of £430,000. Its a three bedroom detached house in an acre of ground, with great views. Two people got to the stage of putting down deposits but pulled out, my guess is because they found they would not be able to build on the acre of land that comes with the house. The house has now been reduced to £360,000, a reduction within a matter of months of around 16%. Its not because it was mispriced compared to other similar properties in the area. The house next door but one to me, a seven bedroomed semi, again with about an acre of land sold two years ago for £500,00, though even this was a 10% reduction from the asking price.

Within about a mile from where I live there are a number of “special” large houses in huge tracts of land. They were put up for sale in the last year for £1.5 million. Each of them have now been reduced to under £1 million, or about 33%. Another house that was up for sale for just under £1 million has now been reduced to just over £600,00. But, around the area there are many other houses that were up for sale for prices between £250,000 and £400,000 that have been reduced by similar large amounts. Its clearly not just isolated instances of mispricing. But, despite these large falls, many of the houses still remain unsold, having been up for sale for as much as a year.

Rightmove also say,

“As well as less property coming to market there is less available stock already on the market compared to the same period last year. Average unsold stock per estate agency branch is 66, the lowest we have measured since February 2010.”

But, a look at their data shows that this figure of 66 compares with a figure of only 68 for the same month last year. And from there on the figure rose sharply over the next months to reach record high figures! But, to be honest, I find that figure hard to believe too, because everywhere I go, I see a forest of for sale signs, and most of them have been standing there for a very long time. That is true whether I drive through urban or rural areas, low priced areas or high priced areas.

Commenting on the latest figures they say that asking prices fell by 0.8% compared to the previous month. But, their account stresses that according to their figures asking prices rose by 1.4% in the first week of January – included in this month's figure. They repeat this several times in their analysis. But, on that basis it must also be true that prices fell by almost 2.5% in the other three weeks! Why not emphasise that, rather than the one week's figure, which could easily just be a fluke figure?

This all reminds me of the way, in which those with a vested interest in maintaining an asset price bubble, be it the Technology Bubble of 2000, or the Property Bubbles in the US, Ireland, Spain etc. attempted to massage the data until the last minute, when everything simply collapsed, and it was no longer possible to hide the truth.

Banks and Building Society's have a vested interest in presenting a picture in which house prices only ever rise, or only fall moderately, just as Government's have an interest in minimising the real figure for inflation. It shows why we need Committees of Workers to provide accurate figures of changes in prices.