Gloomy predictions of a meltdown in the UK’s residential property market have come to nothing. Far from collapsing, house prices have risen beyond their February 2008 peak to a new record, according to the LSL/Acadametrics index released on Friday. The “average” UK house now costs £233,061 according to LSL’s data.
This may come as a surprise to thousands of homeowners struggling to sell property in the north of England, parts of Scotland, Wales and Northern Ireland. In fact, it may be surprising to anyone outside London, the Home Counties and some other parts of southern England.
And that’s the problem. For millions of people in Britain, their home is the biggest asset they will ever own, and understanding its value is of vital importance. But it’s now harder to do than ever before. House price indices, such as those compiled by LSL and others, have been diverging since the financial crisis. Depending on which you choose to believe, they now show that average prices are anything from scaling new peaks to 18 per cent below their 2008 heights. For homeowners seeking to understand what’s happening to their property’s value, this makes them more or less useless.
“These indices were never meant to be used in this way,” says Richard Donnell, director of research at housing data company Hometrack. “They are meant to show a general direction of travel – not to answer the question of what your individual home is worth.”
Several major house price measures are popularly used in the UK. Some, such as Nationwide and Halifax, are based on individual mortgage lenders’ valuations of properties they lend money on. Others rely on statistical models based on actual sales prices data logged by the Land Registry, a government agency.
Obviously, no two houses are exactly alike, whereas two shares in, say, Vodafone carry exactly equal rights. That, in itself, makes index compilation tricky. But because no two lenders’ portfolios are the same, and no two statistical techniques are the same, each index is effectively measuring a slightly different thing.
A different market
These differences have been exacerbated in recent years by the massive change in housing market conditions. Transaction volumes are far lower and the range of prices for which property is selling has increased. These factors undermine the concept of the “average” property, and thus the “average” sale price is less likely to relate to most people’s homes.
Another vital factor is that price indices only reflect the properties that sell. In today’s market, where many people choose not to sell because they might not achieve their desired asking price, this adds to the limited relevance of house price indices for most homeowners.
“The problem for the established indices is that they’re based on a sample of activity in the market,” says Liam Bailey, head of research at estate agent Knight Frank. “So when transactions are half the level they were before the crash, the indices become more volatile and less reliable.”
As a result of this uncertainty and diminishing trust in the main price indices, people are increasingly turning to more tailored and personalised benchmarking systems to understand what the housing market means for the value of their asset.
One example is property website Rightmove, which allows users to set up email alerts for specific areas and property types, meaning they find out whenever a home that’s similar to their own changes hands. Rightmove sends out 15m of these alerts a year, to more than a million subscribers.
Websites such as Zoopla and Mouseprice perform a similar role, allowing homeowners to search for properties in their area with similar characteristics and tell them when the homes changed hands and at what price. “They make the price paid data freely available, so you can pick your own comparables and see what they’re selling for,” says Liam Bailey.
Given the highly subjective nature of people’s housing choices, this kind of personalised benchmarking makes sense, says Greg Davies, a behavioural economist at Barclays Wealth. “A house is a lumpy, illiquid, geographically concentrated, incredibly emotion-laden asset,” he says. “What someone will pay for your house at the time you’re trying to sell it is based on a whole host of non-monetary factors that an index can’t even begin to touch.”
Home or asset?
On a wider note, is the entire notion of a home’s value questionable? Davies argues that homeowners who consider their property to be a financial asset should rethink their attitude. “The continual inclination to think of your house as an investment asset leads to very dangerous thinking and decision making,” he warns. “People make choices about their wider savings and investments based on the supposed performance of their house price.”
For example, a rise in house prices can encourage households to cut back on saving or feel more relaxed about credit card spending. It may also encourage those with other assets to shift them into more risky investments. Buyers often display a “herd mentality” about housing, he warns.
When indices suggest that prices are falling, by contrast, people do not draw back from taking financial risks. “They indulge in the ostrich effect, they don’t even want to think about the fact that house prices have gone down, and when it comes to selling the home they become extremely reluctant to sell for less than this benchmark they have in their head,” Davies says. This explains why house prices tend to stick for a while as the market becomes very illiquid.
It may sound surprising, but perhaps the closest investment comparison to housing is the art market. According to Davies, they share many characteristics, being indivisible, illiquid and tangible.
In both cases this tangibility itself could be a problem for the housing market by making buyers underestimate the risks they are taking, he suggests. “After a financial crisis people tend to go for assets that feel tangible and we have to be cautious about that.” A poll conducted by NOP for the BBC in the aftermath of the Northern Rock crisis, for instance, found that 53 per cent of those questioned considered buying a property to be safer than cash in the bank.
The difference between housing and other “tangible” assets such as classic cars or art is that most households haven’t invested three-quarters of their personal wealth in paintings and Aston Martins. The majority of British people have far more to lose if the housing market falls than if the price of a Picasso crashes. And, to state the obvious, you can’t live in a painting.
● LSL Acadametrics Originally set up in conjunction with the Financial Times in an attempt to improve upon other indices’ methodological constraints. It uses a selection of Land Registry sales data combined with a purpose-built forecasting model. Its results are much closer to the mean average than the Land Registry’s own index.
● ONS Uses a sample of mortgage completion data from the Council of Mortgage Lenders, so does not include properties bought without a mortgage.
● Nationwide Based on mortgage completions by the lender comparing a ‘typical’ house. Biased towards the south of the country and excludes property bought without a mortgage.
● Land Registry Uses its own dataset of all registered residential property transactions, but is limited to repeat sales to ensure ‘apples and apples’ comparisons. This omits new-builds and those houses which only changed hands before its data began in 1996.
● Halifax Based on mortgage completions by the lender comparing a ‘typical’ house, though its definition differs from Nationwide’s. Biased towards the north of the country and excludes property bought without a mortgage.
Winners and losers
Although the message from the UK’s main house price indices is not very clear, some broad groups of winners and losers can be identified. Whether you’re doing well or poorly depends on what you own, and where.
London’s stratospheric performance in recent years means that anyone selling in the capital and moving to another part of the country will be able to trade up to something much more luxurious. By contrast, anyone seeking to move into London will find themselves wincing at the damage to their wallet.
High levels of demand for family-sized homes mean that older people seeking to downsize are likely to free up a sizeable slice of capital to invest in their new, smaller home. But young families looking to trade up to a larger home face paying a premium – research conducted for the Financial Times last year found that the average cost of trading up from a three- to a four-bedroom house was £146,000.
Timing also plays a big part. According to data compiled by Castle Trust this year, four in 10 people who bought their properties after 2007 and then resold them will have lost money. That proportion rises sharply outside London and the Southeast – as many as four in five would have crystallised a loss in Yorkshire, for instance.
Fewer data points mean less accuracy in averaging calculations. So markets and house types with few transactions are likely to have greater pricing ranges. This particularly applies to high-end property and homes in some markets in the north of England.
Houses and wealth
“Buy land – they don’t make it any more,” advised Mark Twain.
The idea of space being finite, plus the recent experience of a huge property boom, has encouraged a widespread belief that housing is as close to a dead cert as investment gets.
And based on the UK’s demographic projections, the continued success of the housing market would seem assured. The government predicts that 220,000 new households will form on average each year in the coming decade. And yet the UK only built 98,000 new homes in 2012 – one of the lowest levels since the second world war. It looks like a one-way bet.
However, things may not be quite so simple. Young people are less likely to set up home on their own than they were 10 or 20 years ago, official figures show. This is driven partly by short-term economic conditions, such as job insecurity and stagnating real earnings, but also by affordability pressures – and these seem unlikely to ease any time soon.
“There’s no doubt there are plenty of young adults out there who would like a place of their own; the issue is whether that aspirational demand will be turned into effective demand,” says Neil McDonald, a former director of the department for communities & local government, and author of housing data tool “What Homes Where?”.
Resolving this issue means making mortgage funding more accessible – the government’s new Help To Buy initiative aims to do this. But increasing mortgage availability will effectively increase demand, and that in turn will push up prices, McDonald warns. “With such a large volume of suppressed demand it is highly likely that prices will continue to rise in the medium term – unless you take an extremely pessimistic view of the prospects for the economy.”
How has housing performed compared to other asset classes? According to an authoritative analysis of the UK housing market, in the 15 years to 2010 it averaged better real-terms returns than either equities or gilts. But this is not necessarily representative. OECD-wide figures from Credit Suisse Research Institute suggest that over the past century housing has delivered much lower returns. It is, however, a good inflation hedge, similar to gold.
But should housing be treated as an asset at all? Unlike equities, gilts, gold or even art, it is also a consumption good.
“People think of their house as an investment, but it should actually be considered as a personal holding, along with cars and collectables – things that people use and enjoy,” says Greg Davies at Barclays Wealth. “Even if my house did increase in value by 20 per cent, I’m not in a position to realise that,” he says. “And I don’t own my house to make a profit – I own it to live in.”
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