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Ray Boulger criticises house price index inconsistencies

Ray Boulger, senior technical manager at John Charcol, has claimed seasonal adjustments are seriously distorting the way house price statistics are reported.

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Commenting on discrepancies between Halifax and Nationwide’s latest house price indices, he says most indices measure different things and figures for any given month, but these two lenders are the exception because they are broadly designed to calculate the same thing on almost the same timeframe.

Boulger says: “This begs the question as to why they often vary so much, particularly on a monthly basis.

“One issue hampering all house price index compilers is the current historically low level of transactions. Nationwide has roughly maintained its market share in the current much smaller market, but Halifax’s market share has fallen and this means there is a double whammy effect for Halifax in terms of having to base its figures on a smaller share of a smaller market.

“Notwithstanding these challenges, a major reason for differences between monthly figures from these two lenders is that the figures they announce in their press releases are seasonally adjusted.”

He says Nationwide provides the non-seasonally adjusted figures for average house prices in its press release, but Halifax fails to do so.

“The February figures from each lender provide a good example of how the seasonal adjustments are seriously distorting the way house price changes are reported. Halifax reported a seasonally adjusted fall of 0.9% for February but the real change was + 0.1%, whereas Nationwide reported a seasonally adjusted increase of 0.3% but its real figure was unchanged on the month.

“Thus the real house price change in February recorded by both lenders only differed by 0.1%, well within the impact of sampling differences, whereas the seasonal adjustments applied by the lenders differed by a whopping 1.3%, with Nationwide increasing the real figure by 0.3% and  Halifax reducing it by 1.0%. This makes nonsense of the seasonal adjustments and hence the reported figures.”

Boulger explains Nationwide uses the US Bureau of the Census X12 for its seasonal adjustment calculations, whereas Halifax uses the US Bureau of the Census X11.

He says: “The fact these two methods of adjustment produce such different results suggests that either one or both of them are flawed, or one of them is not suitable for the purpose for which one of the lenders is using it.

“Many factors affect house prices, some more than the seasons. Changes in interest rates and consumer confidence and significant changes in mortgage criteria and availability all have a critical input. The various house price indices would be much more useful if the focus of the reporting was on the real figures.

“If necessary the government could take the lead here, in the interest of increasing clarity in these economically-important monthly statistics. The review of the various house price indices currently being carried out by the government provides an ideal opportunity to assess how presentation of the data can be improved.”

Boulger adds: “If investors, encouraged by regulators, had not blindly relied on flawed assessments on credit quality by the rating agencies but instead made their own judgement of the quality of so called triple AAA securities, the credit crunch might well have been much less severe.

“Because the movement in house prices is such an important factor influencing many UK policy makers, it is vital everyone concerned has good access to the real figures, which then allows individuals to formulate their own view as to how important seasonal influences are.”

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