Investment: Everyone out of step in the housing market

It's surprising that the statisticians are failing to use the one thing that could help unravel the house price mystery, which is common sense

THERE MAY not seem to be much of an immediate connection, but the news that the Bradford & Bingley is being forced reluctantly to demutualise seems a good moment to revisit the strange and so far unexplained mystery of the divergent house price indices. For many years there have been two prominent indices that track changes in house prices in England & Wales.

Both are prepared by prominent mortgage lenders - one by the Halifax, the other by the Nationwide Building Society. For many years, it was difficult to find much daylight between the results. Suddenly, about two to three years ago, something strange occurred. The two indices began to march at a quite different pace. For most of the past two years, house prices as recorded by the Nationwide have been growing substantially faster than those recorded by the Halifax.

In the third quarter of 1997, the Nationwide index recorded that prices were 12.5 per cent higher than they had been 12 months previously. According to the Halifax, however, the annual rate of increase was barely half that amount, 6.6 per cent. For three quarters in a row the rate of increase shown by the first index was more than double that shown by the second.

Although the gap has narrowed a little more recently, the divergent readings of the Halifax and Nationwide indices continues. Confused? You are not the only one. The divergence between the two indices is noteworthy because the two series had so closely tracked each other before. The fact that they are now marching in different directions casts an obvious doubt over their reliability as an indicator of what is happening to prices and economic activity in this country.

The difference is important, not just to impatient homeowners, but to economic policymakers as well. House price inflation is one of the key indicators the Bank of England monitors in setting interest rates. Having been embarrassed a year ago into a misguided interest rate change by rogue readings from the statistics on average earnings, the Bank's monetary policy committee has been concerned to try to find out what has gone wrong with the house price indices on which they were once happy to rely.

As I discovered last week, when I dropped in on a Bank-sponsored seminar on this issue, the house price issue has prompted a feverish bout of analysis and soul-searching by the country's statistical profession. The two rival indices have been taken apart and backtested repeatedly, both internally and by independent experts, to try to eliminate all the most obvious reasons why they might suddenly have started to diverge. We now have it on the best statistical authority that many of the explanations simply don't hold water.

For example, one popular view has been that the difference simply reflects the fact that the Nationwide typically lends money on more properties in the richer South, whereas the Halifax is more heavily concentrated in the North and Midlands. The statistical analysis is quite conclusive, however, that this is not the cause of the divergence in the price indices. (Common sense would suggest that if this were the cause, it would have shown up before the 1997 hiatus.) Both indices, it should be said, were constructed with the advice of outside experts and are based on sufficiently large samples to produce statistically significant results.

The conclusion of the various expert speakers at the seminar was that the divergence in the house price indices remains, officially, a mystery. So concerned has the Bank itself become that it has started its own house- price index, based on data held at the Land Registry. The advantage of this data is that it is based on actual prices paid for properties, including those bought with cash. The Halifax and Nationwide indices by contrast are based on the prices borrowers have agreed to pay at the mortgage application stage.

By definition, the data in their two indices excludes the 25 per cent or so of properties that are bought without a mortgage each year. The drawback of the Bank index is that the Land Registry data does not include the detailed breakdown of transactions by type and size of house that the two building society samples provide. So it provides very few meaningful explanations of how and why house prices are changing. For the record, however, the Land Registry data suggests that house prices are, in fact, rising at a rate which is about halfway between that recorded by the Halifax and the Nationwide.

The one surprise to me in this great debate is that all the statisticians are failing to use the one faculty that might help them to unravel the mystery, which is common sense. It is surely more than coincidence that the divergence arises during the period when Halifax was preparing to demutualise and Nationwide was stepping up its campaign to remain the leading mutually owned building society.

We know that the Halifax's share of the mortgage market has fallen sharply since its flotation, while that of the Nationwide has increased. The gap between the two lenders' mortgage rates has suddenly become very wide. The two lenders are pursuing very different lending strategies. At the same time, the market has been experiencing an unprecedented degree of competition, with the widescale use of cashbacks, discounted mortgages, flexible loans and all the rest of it.

In other words, we have been witnessing unique and unprecedented behavioural changes on both sides of the lending equation. The moral is: don't put too much reliance on any indicator of prices until the war between mutuals and demutualisers has run its course.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?