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Contrasting U.K. Indexes Keep Homebuyers Guessing

Competing U.K. Indexes Keep Homebuyers Guessing
Britons deciding whether to buy, sell or invest in residential property are left to sift through at least seven indexes that provide different results and regularly diverge on the direction of prices. Photographer: Chris Ratcliffe/Bloomberg

U.K. home prices are rising. Or they’re falling. It depends whom you ask.

Property researcher Hometrack Ltd. reported a 0.9 percent monthly decline in October, the biggest since January 2009. Mortgage lender Halifax said prices rose 1.8 percent, rebounding from a 3.7 percent drop in September. Acadametrics Ltd. tracked a 0.3 percent gain, pushing prices to the highest since June 2008.

Britons deciding whether to buy, sell or invest in residential property are left to sift through at least seven indexes that provide different results and regularly diverge on the direction of prices. That adds to uncertainty in a market where confidence is already low and keeps some buyers and investors out, according to Christopher Down, chief executive officer of Hearthstone Investments Plc.

“It has been very difficult to define a residential property benchmark because there are so many different indices out there,” said Down, who plans to raise as much as 500 million pounds ($788 million) for a U.K. housing fund starting next year. “The appetite to invest in the sector is unquestionable, particularly with the retail investor.”

The seven indexes only agreed on the direction of the market in five of the 22 months through October, according to data compiled by Bloomberg. The last time was in January, when all indicated a price rise.

Today’s Numbers

Halifax said today that U.K. house prices slipped 0.1 percent in November as demand weakened and the government prepared to implement the biggest spending cuts since World War II to reduce a record budget deficit.

Indexes covering at least three months give a more accurate picture of the market, according to Steve Morgan, chairman of housebuilder Redrow Plc. Comparing longer periods helps “smooth out the volatility currently experienced,” he said. Of the seven most-used indexes, only those produced by Halifax and Nationwide provide quarterly data.

Redrow, based in St. David’s Park, Wales, uses its own data to see where prices are going. This shows that values have been stable in the second half, Morgan said.

Britain’s Statistics Authority is reviewing the “coherence and comparability” of the government’s two indexes and will also assess public satisfaction with housing market statistics in general, the agency said in August.

Government Review

“We’re looking at official measures and the extent to which these meet the users’ needs,” said Jason Bradbury, chairman of the review’s steering committee. “Where there are gaps, we will be looking to see what can be done to better meet that need.” The findings should be published within two months, he said.

Though the government won’t be able to stop lenders and data providers from publishing indexes, it could push for greater emphasis on three-month figures, said Fionnuala Earley, an economist at Royal Bank of Scotland Group Plc.

“There is confusion when the data is volatile, which can happen if there are a low number of transactions or the market is at a turning point, both of which could apply now,” she said.

Down says Hearthstone’s fund will be in a similar format to equity index trackers, which follow the movement of the broader market, so he needs wide coverage that’s timely as well.

“The most appropriate dataset we’ve found is Acadametrics. “For our purposes, we need as full coverage as possible and yet we need it to be timely,” he said. It seems to have managed to square the circle between timeliness and data. It’s a very rigorous index.”

Partial Coverage

Acadametrics is a research company that combines housing transaction data from the U.K. Land Registry and other price measures to produce an estimate for the most recent month. The number is then revised in following months as more complete data becomes available. It doesn’t cover Scotland, which Hearthstone’s Down wants to include in his portfolio.

The last report from London-based Acadametrics, on Nov. 12, showed that home prices climbed 6.1 percent in October from a year earlier. That was the biggest increase indicated by any of the seven indexes. At the other end of the scale, Hometrack recorded a 0.1 percent decline.

In the U.S., the S&P/Case-Shiller index is considered the country’s standard home price gauge. It’s based on the average price of completed transactions across 20 metropolitan areas and published with a two-month lag. In Spain, buyers and sellers rely mainly on data from the government and, the country’s largest property website.

Fewer Properties

About 600,000 residential properties changed hands in the U.K. in 2009, half the level of 2006, according to the Land Registry. About 69 percent of people in Britain own their homes.

The government’s Land Registry is the only source for the actual price paid in residential property transactions in England and Wales, including those made for cash. Indexes from lenders Nationwide and Halifax are based on mortgages that they offer. Rightmove Plc, which operates the U.K.’s largest residential property website, provides asking prices from a sample of properties offered on the site. Some measures are based on data from England and Wales only, while others look at the whole U.K.

The different measures also produce contrasting house price averages across the country. In November, Hometrack’s estimated price was about 155,000 pounds, while Rightmove’s asking price was close to 230,000 pounds.

Frustrated Homebuilders

Data from the Communities and Local Government department includes mortgages from the Council of Mortgage Lenders and excludes cash buyers, who account for 25 percent of all transactions. The Land Registry data consists of properties sold at least twice since it started in 1995, excluding about two-thirds of U.K. property and all new homes.

U.K. homebuilders say they are frustrated with the range and volatility of the indexes used because their shares often move in the direction of an index on the day of a release. When Halifax said home prices plunged by 3.7 percent in September, the Bloomberg EMEA Home Builders Index dropped by 2.3 percent, the most in a month.

“You can almost read the data and tell whatever story you like,” Taylor Wimpey Plc CEO Pete Redfern said in an interview. “They all look at different things, which can lead to quite a distorting view.”

House price indexes are a poor measure to use when investing in homebuilders because they don’t account for changes to land values, which are more relevant to future earnings, said Gary Channon, chief investment officer at Phoenix Asset Management Partners.

‘So Much Noise’

“The huge number of U.K. house price indices creates so much noise that the true picture rarely emerges,” Channon said in an interview. “Unfortunately, they are produced by organizations that release them with their spin.” Phoenix owns 5 percent of Barratt Developments Plc, the country’s biggest homebuilder by volume.

Halifax offers the longest uninterrupted monthly data set of any U.K. housing index and usually leads rival Nationwide at reporting turning points in the market, according to Jessica Lord, a spokeswoman for parent company Lloyds Banking Group Plc. Both are based on valuations by their own surveyors.

“The mixed pattern of monthly rises and falls so far this year is consistent with a slowing, but not necessarily falling, market,” she said in an e-mail.

Rightmove lists more than 90 percent of the homes for sale in the U.K. and takes the average of all listings excluding outliers, according to spokesman Matt James.

“We are therefore very well-placed to give a good early indicator of the direction the market might take,” he said.

Strategic Pricing

While Rightmove is very timely, “there is often a lot of strategy with selling prices,” said Earley of RBS. “Sellers never expect to get that price.”

Halifax and Nationwide now rely on less data than they used three years ago because they’re offering fewer mortgages, Down said. That makes the results more volatile. Approximately 144 billion pounds of mortgages were granted last year, compared with 363 billion pounds in 2007, according to the Council of Mortgage Lenders.

The Land Registry doesn’t distinguish between property types or the number of rooms homes have, whereas the lenders weight their indexes according to property type, to avoid one kind of home dominating a certain month.

“There is a huge amount of data, and putting it all online could be problematic, but in time it will happen,” David Thorpe, the founder of Acadametrics, said in an interview. “The government review is necessary because we have a number of indices delivered to a public that’s already confused. Without a huge increase in the quality of the data, it’s an unsolvable problem.”

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