New index aims to plot what house prices are really doing

The Government today moves a step closer to its holy grail of producing the definitive survey of what is really happening to UK house prices with the launch of a new monthly index.

The new survey, which replaces the current quarterly index set up in 1968, has been developed to ease concerns from the Bank of England and the Treasury that the existing monthly house price reports from the Halifax and Nationwide mortgage lenders and other surveys send conflicting signals to the market and policy makers.

Rightmove, which bases its survey on estate agents' asking prices today, for instance, reports the biggest fall in house prices in 18 months. It calculates that prices in September fell by 0.6 per cent nationally - and by an even bigger 2.8 per cent in London - to produce an annual inflation rate of 9.1 per cent, down from 12.4 per cent in August. The latest surveys from the Halifax and Nationwide, in contrast, show monthly rises in August of 1.3 per cent and and 1.1 per cent respectively and annual increases of 19.1 per cent and 16.6 per cent.

Keith Hill, the housing minister, said the new index would provide "a clearer indication of the state of the market".

Eventually, the Government intends to use the index when compiling the monthly inflation figures, which include an element to reflect changing house prices. The new index, based on information from more than 50 mortgage lenders, will be based on completion data, as opposed to the current Halifax and Nationwide surveys which are based on mortgage approvals. Initially, it will be available only on a non-seasonally adjusted basis - making meaningful month-on-month comparisons impossible. The index will also be two months out of date. The first index, due to be released this morning, will relate to July 2003 prices.

The survey will use data based on 25 per cent of all completions or roughly 25,000 completions a month compared with just 5 per cent used previously, a government spokesman said. However, it will exclude data from the Land Registry, because of the time lag involved, and cash purchases which represent a quarter of all housing transactions.

"We are still grappling for the perfect index", one government source admitted. A definitive survey would need "parallel developments" in Scotland and Northern Ireland, which have separate Land Registries, the source added.

The new index will be mix adjusted, based on weights calculated at the start of each year. Its annual house price inflation figure is likely to differ from those by the Halifax and Nationwide because the government index will be weighted according to the value and not the number of transactions. So when house prices are rising less quickly in London and the South East than the rest of the country - as they are currently - the Government's estimate of house price inflation will be lower than those of the two big mortgage lenders.

A spokesman for the Bank of England said it would consult the new index when it was judging whether interest rates needed to rise or fall to meet its inflation target of 2.5 per cent. "We use all available information in assessing economic prospects", he said.

Apart from the UK, only the Netherlands, Portugal and Iceland produce national monthly house price indices. The development of the new UK index was overseen by a group representing the Bank of England, the Treasury, the Land Registry and the Office for National Statistics.

According to Rightmove, the average price of a house nationally fell to £165,265 in September whilst the average house in the capital is now worth £251,472, down £1,888 on a year ago. Asking prices were up 3.9 per cent in East Anglia and 3.2 per cent in Wales but they fell 3.5 per cent in the north and by 1.9 per cent in the West Midlands.