Is the housing price index reliable?

treecol

We're currently on the market. We had been on 3 times in 3 years. We withdrew the house from the market twice in the past due to family illness and then went on again just before lockdown. We had a good offer and then over lockdown the chain collapsed and we took it off the market to see what would happen with the virus. Our EA told us, once they reopened there was a bit of a housing boom and we thought we'd try again. Had a bit of a low offer after about a week and said we'd see if would work for us. Now our EA told us we needed to drop our asking price by £25k after lockdown as prices had gone down. We argued non of the houses on rightmove we were looking to move to had dropped, but he was insistent as it was early days, we'd see prices fall in the coming weeks. So now, we're putting in offers on about half a dozen houses we like, only to get a lecture from the EA (and I'm not exaggerating about the lecture) about how much prices have gone up according to Nationwide property index. So I put our house value at 2017 when we first out it on, into their calculater and the index says it should have gone up by about £25k since then. But under the advice of our EA, we're on at £75k less than our price in 2017!
So who is right? I know our EA is always selling lower than others in the area but as we had been on and off the market quite a lot, we thought it would help sell it quicker to drop a little. I even put in the price we were on at before the lockdown and it said we should have gone up since then yet EA said prices have dropped. I have raised this with our EA who says we're incorrect and other EA should know prices have been falling for years. But there are no comparable properties around as low as ours, they're all much higher.
We're in East Dorset near the edge of the New Forest and about 12 miles outside Bournemouth in a popular semi rural area. So how accurate is the index please?

numbercruncher8

The index is a generalisation... you'll get some people saying it was very accurate for them and other people saying it was very inaccurate. It's largely meaningless from a personal point of view because there are many other aspects which determine value. 
Two identical houses next door to each other sold for the same price at a point in the past may have the same value on a calculator, but if one was modernised and the other was not.....

The only real relevant data for your own house sale is what's currently happening. Maybe post the link? Asking prices are not sold prices, what has stuff being shifting for?

The only thing I can think of is that not selling for 3 years, there must be something wrong. Unless nobody is moving in your area, it is clear that people are choosing other properties over yours.

AdrianC

treecol said:

We argued non of the houses on rightmove we were looking to move to had dropped

Nor have they sold.

The index is, historically, accurate. It is based on sold prices, as reported to the Land Registry, and on mortgages issued.

In very unusual, very short-term conditions such as these...? No, it can't possibly be. It takes time for sales to filter through to LR, even post-completion. Sales completing now will mostly have been agreed pre-lockdown - yours may be one of them, if the chain hadn't collapsed.

princeofpounds

Well, it's not THE index - there are several indexes and they all measure different things (I know you know this, just making it clear).

The index is accurate - it is constructed in a mechanically mathematical fashion and I presume mistakes are rare and tend to be diluted in the average - but that does not mean it is necessarily representative, and certainly not in terms of being representative of a specific house.

If you are interested in the full answer, this is how Nationwide do it:
https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/nationwide-hpi-methodology.pdf

Key points:
- This index tracks approved mortgage prices. Not actual sales (land registry data is used for that, but has a severe lag) and not asking prices (rightmove index does that).
- The data is adjusted for seasonality, and also for mix of the type and size of houses. This means that the index is obviously an estimation, but one driven by a valid statistical process. These adjustments are actually far bigger than the normal underlying change you get from month to month, so it's a heavily-managed statistical index to be frank.

You should also look at the different dynamics in terms of YoY and MoM pricing. The last two months have seen price declines of 1.7% and 1.4%, but it's only been just enough to turn YoY flat. But these rates of decline are unusually fast for the index; - if 1.5% MoM falls are sustained for a year, that's a 17% decline in house prices (I am not saying that will happen!). It just tells you are we are still in the middle of an adjustment.

Whilst the Nationwide data is nothing like the land registry data in terms of lags, it does also lag. Approved and valued mortgages that are coming through in June probably represent mortgages where the process started a couple of months previously. Where deals have collapsed due to buyers requiring lower pricing, these will not appear in the numbers as the mortgage was never approved.

This last point is particularly important as transactions have collapsed ~60%, as you can see in the data below. This is a HUGE change and a big statistical challenge for the index, as those transactions that completed are probably fundamentally different in some way from those that did not complete, and agreement on price is probably the biggest driver of that. This would seem to suggest that the market clearing price, where buyers and sellers would meet at 'normal' levels of volume, is not where the index is currently.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/894006/MPT_Com_Jun_20__cir_.pdf

Enough rambling. The bottom line is:
- The index is accurate in terms of what it measures, but it is not representative of an individual property.
- The index does lag, due to paperwork timescales but also because transactions that fail due to price negotiation are not captured until new price agreements are struck, and that takes time.
- The index and the underlying market is clearly in the middle of a rapid downwards adjustment. It's an open question how far or fast that goes on for, but you would expect the trend to slow before stopping.
- Your EA will always talk you down in terms of pricing and buyers up in terms of pricing. That's what they do, bridging the bid-ask spread to make the transaction and get paid.

So I wouldn't rely on the index as a guide to marketing your property right now. Nor would I accept the agent's advice at face value, even if there is a kernel of truth in it. I think your best bet is to compare yourself to other comparable properties on the market - make sure your pricing is competitive enough that people will actually look; that's all it needs to achieve. Then see what offers come through the door - that's the true test of where the market is. 

My personal view is that we will see a quick but limited price correction; they will not fall too far because BoE interest rates were slashed further. The banks did not pass this on as they were fearful of what may happen and required a greater profit margin to cover their perceived future risks, but as the situation normalises they will start to compete with lower margins again and cheap mortgage debt will continue to support pricing.

One final PS you might find interesting. Back in 08/09 I used to track something I called the 'index of delusion' - it was the difference between the Rightmove asking price index and the nationwide (or land registry) index which gives a better idea of actual transaction values. Statistically it's not a very valid thing to do, but it does tell you something. The behaviour was really interesting - asking prices barely budged for months, but the discount at which transactions actually happened got much larger (like from 5% to 15%). 

treecol

Thank you for the helpful replies. As I said it's not a question if wondering why my house hasn't sold, it was only on twice briefly before we had to take it off while we cared for terminally I'll relatives, then we were under offer when the lockdown happened and the chain collapsed. So all in all we've hardly been on long at all. I just want to make sure we're not being given duff advice. So thank you for your thorough answers. 

lincroft1710

Using HPIs to work out historic prices from actual current sales, showed them to be inaccurate (20% in the worst cases), but how accurate they are going the other way is anybody's guess