What is causing the disparities in UK house prices indices?

Building society Nationwide has reported that the average UK house price grew by 0.7% in the month of February 2021, resulting in annual growth of 6.9%, which is among the fastest rates seen in the past five years. In contrast, Halifax Bank found that the average UK house price decreased in February compared with the previous month, putting annual growth at 5.2%. In agreement with Halifax, the property portal Rightmove reports that price growth in February had slowed to half the pace reported in December, with a further slowdown reported for March. There is a noticeable divergence in figures being reported, with experts warning that this gap could widen in the months ahead. Figure 1 demonstrates recent widenings in the UK house price indices.

Figure 1: Graph showing UK house prices indices 2018-2021. Financial Times

Therefore, gathering conclusive data on the state of the UK property market and making predictions can be quite troublesome. First and foremost, this problem arises as each index is based on a different stage of the buying process. Indices based on asking prices, such as those of Rightmove, reflect sellers’ attitudes almost in real time, however, do not show what buyers are willing to pay. As a result, February indices based on asking prices do not reflect the perception of the market at a time near the planned end of the stamp duty land tax holiday, a measure which has now been extended until June. In contrast, sales-based indices, such as the official data for completed transactions, are based on prices agreed when the scheme had been launched in July 2020. Indices that track house prices based on mortgage offers, such as those derived by Nationwide and Halifax, capture prices settled in the middle of the buying process but are less comprehensive as they omit cash transactions and buy-to-let purchases. Additionally, they only cover their customers, which does not provide a completely accurate representation of the whole population.

According to Tom Bill, head of residential research at Knight Frank, different types of indices are more likely to diverge when there are significant changes in housing market trends. Consequentially, the COVID-19 pandemic has resulted in a host of disparities opening in the housing market indices. Major influences the pandemic has had on the property market in the UK include the market’s closure in the first half of 2020 followed by the aforementioned ‘stamp duty holiday’ being introduced, followed by an increased economic downturn in the winter owing to a second national lockdown being put in place. In addition, lockdowns are changing the balance of buyers and sellers at a faster rate than usual, introducing volatility across most indices.

Exceptional circumstances have somewhat distorted the consistency across house price indices; nevertheless, these indices are broadly comparable over the medium term. It is important to consider the data from multiple indices, however, for the purposes of gauging the trend in house prices in a localised area, the price of a similar property to the one of interest sold in the recent past is a fairly accurate measure of what can be expected.

By Daniel Gaskin

Sector Head: Theo Thomas