The housing market is at a record high it says. Well, that depends on who is writing the headlines, and for what reason, and from what source.
Firstly, there are a few measures for the housing market in terms of an index (e.g. Rightmove, Office of National Statistics etc) and you should stick to the one which makes sense but there are also many financial measures to assess if it is overheated or not. I’ll cover those later.
You will see many house-price financial columns quote the relevant indices. All of them will say they are the best, longest running etc. So, which is the more accurate to use so you understand what house prices are really doing?
The Halifax data only includes the Halifax’s mortgage approvals, and it excludes cash buyers which represents around 30-35% of all sales. When interest rates are higher, more people use cash. If the Halifax is not lending as much in a particular part of the country (just as Nationwide below) that will create inaccuracies as those areas are not reflected.
Nationwide is the same - it only uses its own customer data.
Rightmove measures ‘asking prices’, which could be higher or lower than actual sales prices, depending on market conditions. Its data could be used to compare the difference between asking prices and actual sales, but, as an index, it just covers what people are asking, which is not accurate in today’s market conditions. At best it’s a reflection on sentiment and that’s it. Naturally, as it only includes valuations, it won’t include what cash sales are happening. Rightmove has a much larger sample size than Halifax and Nationwide.
Zoopla is an accurate index as it covers completed sales, mortgage valuations and recent sales data. It’s not longstanding so it’s difficult for me to assess similar historic economic market conditions to today’s events, but it’s an accurate and comprehensive assessment of today’s conditions.
The ONS and Land Registry both provide accurate historic data based on completed sales i.e. what happened so obviously more accurate. The latter two, and to a degree Zoopla, all have a lag in their data as completed sales take time to register and come through later from the land registry. Asking prices are here and now, as they are on the internet in real time. That’s useful for seeing how sentiment is moving, but not it’s actual facts. So, it’s Rightmove for immediate feelings, and
Zoopla, ONS and Land registry for facts. I’m wondering why Rupert Murdoch had bid so highly for Rightmove’s purchase?
So, what measures should you consider when deciding if a market is overheating or the reverse? Everyone needs a home, so the ‘house price to rent ratio’ is a good driver, as it compares the cost of buying versus renting.
‘House price to income ratio’ is checking for affordability levels. This is useful alongside affordability stress testing (which includes mortgage rates) as this is a large part of the ‘demand’ side of the supply/demand.
‘Mortgage approvals’ is measuring shorter term market trends and gauging actual buyer activity, albeit just those with lending, which is 66 per cent of the market.
‘Total property transactions’ will tell you both mortgaged and cash sales.
‘Housing supply and demand’ measures new properties built and existing homes for sale, which will help give you an indication of any supply-side constraints. You can also measure construction orders, which, for new housing (according to Trading Economics report on Construction New Orders) were significantly down in the whole of 2023, but up measurably in quarter two of this year by 5.4%year on year.
‘House price growth rates’ is historic and although accurate, it is telling you that it was raining or sunny when you are already wet or sunburnt.
‘Rental price inflation’ can indicate strong demand in the rental market, often driven by unaffordability in the purchasing market. It also affects the buy-to-let market – the higher the rent, the greater the interest.
I’ll cover the detail of the key measures from the above next week alongside other factors to give you a steer on the market.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a mortgage question or an equity release enquiry, contact my mortgage director Pat Greene on 028 6863 2692 or email pgreene@wwfp.net
