Assetz® News - Nationwide house price figures highlight the growing divergence of mortgage-related data from the Land Registry actual data

Nationwide house price figures highlight the growing divergence of mortgage-related data from the Land Registry actual data

31st August 2008 |

The real truth about house prices is out there but not on the front page of your daily newspaper, unless it is the FT.

The Nationwide house price figures released this week, claiming the average price of a home in Britain has fallen by 10.5% since August last year, highlights how strongly the mortgage-related indices are diverging from 'whole of the market' data.

Halifax and Nationwide are both showing dramatic year on year falls in house prices (Halifax's most recent data showed an 8.8% fall to July 2008), but this is not being reflected in Land Registry based indices from CLG and the FT house price index, with the latter showing growth of 0.3% in the last year (See graph). Halifax and Nationwide indices are based purely on their own mortgage approvals and not the market as a whole.

This divergence has been caused in part by mortgage lenders charging relatively high mortgage rates versus the Bank of England base rate and failing to pass savings on to customers as base rates have fallen. In addition, the mortgage company house price indices are the ones used primarily by the media leading to a growing reduction in buyer sentiment.

Mortgage rates are still high, and even though they are getting closer to where they were just before the credit crunch, there have been three quarter point rate drops during this period. This means the banks are charging around 0.75% more than they were a year ago, albeit with their lending costs from LIBOR being higher. In addition, mortgage arrangement fees are significantly higher.

This has resulted in purchasers haggling down property prices by a few per cent to compensate for their increased borrowing costs.

Data from Halifax and Nationwide is becoming less and less representative of the housing market as a whole, reflecting only the part of the market that is mortgage related and only the lower end of the market. The FTHPI (Financial Times House Price Index) based upon the whole-of-market Land Registry data currently shows house price growth of 0.3% for the last year whilst the Halifax and Nationwide figures show 8.8 and 10.5% drops respectively. Even the Land Registry's House Price Index (which is itself flawed currently as it does not use all of its own data amazingly, see below) shows house prices down just 2% year on year.

With the average house price of a Halifax or Nationwide customer being below that of the national average (by around 25% versus the benchmark FT index using the whole of market Land Registry data) it is reasonable to deduce that their loan to value is also higher than the national average as the client is less well off and therefore these customers need higher loan to value loans and are being penalised with higher rates and higher fees as a result of the lenders charging a premium for perceived risk.

It is doubtless these penalties are leading to the price negotiations being in the purchasers favour if a deal is to be struck and also doubtless behind the large drop in transactions as many sellers refuse the low offers being made. In addition sentiment as a whole is being eroded for purchasers with the mortgage company house price indices being mainly quoted are depressing their confidence. We are in a negative feedback loop for this sector of the market as a whole and this is what is driving these two lender indices. It must also not be forgotten that many of the valuers are owned by the lenders themselves and that they act for the lender primarily even though they are paid by the house buyer.

Before the credit crunch, the Nationwide and Halifax data reflected house price growth in a very similar way to the other indices, but their rate of decline is much steeper than the whole of market land registry based indices such as the FT index. We are now seeing the creation of two markets: those heavily reliant on mortgages and those able to rely on substantial deposits or cash."

It is clearly the bottom end of the market that is under the most pressure due to the current mortgage lender terms, with the top end showing greater resilience. Different sectors are clearly affected by the credit crunch differently and there are definitely lower prices in many locations but the Land Registry currently shows that the average house price change is very different to the negative picture painted by the relatively small lender surveys and we would suggest they are no longer used as representative of the market as a whole until the market returns to normal.

One last point, when I say Land Registry holds the true data I don't mean the Land Registry House Price Index, or at least not yet. The LR HPI only includes the 2 million sales that are repeat sales since April 2000, not all the 9 million transactions that have occured since then. Why ? Because over time this will give the most precise data on house price changes but in the beginning it just leads to yet another distorted snapshot based upon houses that tend to sell more often and excluding houses held for a long time.

The Financial Times house price index uses ALL Land Registry data (after around 90 days when all the data is in), however in the meantime it uses a mix of the cleverly adjusted version of the mortgage approval data plus very early (and only partial)from Land Registry. The early announced results vary little over the coming two months making any current announced house price index from the FT clearly a very accurate predictor of the eventual Land Registry data and it lags no more behind the real house prices than Nationwide and Halifax mortgage approval values in this first announcement meaning it can be compared like for like. It is clearly the most accurate house price index in the land, the one based upon the most data and it happens to show house prices are UP 0.3% year on year. It clearly exposes the Halifax and Nationwide indices as poor quality proxies for measuring the performance of the nation's biggest asset in todays's exceptional circumstances. No wonder it is little talked about as that isn't going to sell papers.

Stuart Law
CEO
Assetz plc