HOUSING MARKET by Mr Ray Boulger

This week the Economics Society was addressed by Mr Ray Boulger, senior technical manager at John Charcol and a leading expert on the UK housing market and mortgage finance.

The issues addressed in the talk were:

  • Seasonally adjusted house prices
  • House price indices
  • Effects on house prices
  • The current situation


Seasonally Adjusted House Prices

Mr Boulger began by giving an overview of the numerous house price indices we have in the UK. It was noted that it is not unusual to find that these often conflict with each other. Not only this, but they vary considerably with respect to time so that whilst you may find an increase in house prices by 0.8%, the following week you may find they have fallen down by 1% which may seem confusing. The starting point to interpret these indices is to understand what exactly they are measuring and how they are calculated.

Mr Boulger argued that seasonally adjusted house prices cloud the real data. A recent example of how data can be manipulated has been witnessed as the banks are accused of having manipulated the LIBOR (London inter-bank lending rate) rate. The LIBOR rate is calculated by the quotes which are submitted by the banks and which state the prices the bank would have to pay to borrow from other banks which. The LIBOR rate is calculated by taking off the top and bottom 25% of the quotes and taking the average of the quotes left. Since some traders had an interest, they manipulated the LIBOR rates since even a tiny difference in the rate could make a huge difference in terms of the banks’ profits and in turn on their bonuses which are attached to the profits.

Similar to these LIBOR manipulations, Mr Boulger argued that seasonally adjusted house prices manipulate the actual prices. As house transactions decrease in the months of December and January and the market is quieter compared to that in spring, we assume that house prices will tend to underperform during the winter months and over-perform in spring. Hence, house prices are adjusted upwards in winter months and adjusted downwards in the spring months regardless of the real data to calculate the house price index.

House price indices

There are several house price indices in the UK and these often differ numerically given the differences in their calculations and depend on what they are measuring.

Mr Boulger mentioned that the Halifax and Nationwide house price indices are the only indices that roughly measure the same thing. They are both timely; Nationwide calculates its figures up to the 25th of the month and announces them towards the end of the month and Halifax takes calendar month’s figures and they are released later. Both these indices are based on the mortgage lending these banks do, that is, they take the house prices of the houses that people are buying using their loans. Nationwide uses 100% of the lending they do to calculate these figures and Halifax does close to 100%. A plus point of these figures compared to some of the others is that these indices cover the whole of the UK. What both these figures are measuring is what they consider to be a typical house and not the average price of the every house sold in the UK. Their definition of a typical house is a 3 bed semi and the cost of this is quoted to be £165,000 by Halifax and Nationwide.

Unlike these indices, the LSL Index measures the average price of every house sold in the UK and the figure quoted by this index is £226,000. The massive difference between this figure and that of the Nationwide is due to the differences in what they are measuring. This also includes properties bought using cash and which are financed not using lenders unlike Halifax and Nationwide indices do. The other difference is that of the timescale. Whilst the indices of Halifax and Nationwide are timely, the compilation of the data of LSL takes time. On the plus side, LSL is by far the most accurate. Another index is that produced by ONS and is the only one that is not seasonally adjusted. However, this index is released very late, usually 2 or 3 months later, which deprives it of its value.

The difficulty in measuring and compiling these indices was highlighted given the fact that there can be huge variations between regions and also certain areas within a region.

Effects on house prices

Amongst the factors which influence house prices, the following were discussed:

  • Infrastructure in the region – Infrastructure, planned or actual, can push prices of houses in the area up as demand tends to be greater for areas which have access to good infrastructure. Increased roads or Cross Rail can lead to  higher prices
  • Schools – Often house prices tend to higher near the schools which are well-reputed. The demand for houses increases along with the demand for places in these schools as admission is easier, or in some cases, only possible, if the residence is in the allotment area.
  • Cost of finance – the interest rate charged on the mortgages play an important role in affecting the house prices
  • Availability of finance – this was cited to be the most important factor affecting the house prices. Pre-recession the boom in house prices was fuelled by banks offering mortgages of up to 100% along with some banks like Northern Rock offering an additional £30,000 on top. Mortgages were perceived to be a relatively risk-free and in the risk of default, it was assumed the asset would still cover the value of the loan. The increased and facilitates availability of mortgages fuelled the demand for houses leading to a rise in house prices. (This can be analysed using the traditional Demand and Supply curve analysis for the housing market where the rise in price follows the shift out of Demand curve).

For the banks, this was because they perceived a low credit risk and often had targets to meet. This increased lending meant that they were borrowing from capital markets on short term basis whilst they were lending long term. A perfect recipe for collapse! When the crisis began, house prices fell by approximately 25% as lending was heavily reduced and demand for houses fell (Demand and Supply analysis again). Since then demand has recovered and prices have risen by 10% and now remain flattened. Mr Boulger said that it would take the UK a long time to get back to the levels of house prices to get back to where they were pre-crisis.

The current situation 

Given that the national economy has been facing a downturn, so has the property market. The government is trying to stimulate the property market which is a key part of the economy by maintain low interest rates and through schemes like Funding for Lending. This has increased competition in the mortgage market and also improved the lending criteria with a few lenders offering up to 95% of the house price as mortgage. The improvement is happening although gradually but it will take us a long time to return to the conditions pre-crisis though we do not want to return to quite the figures before the crisis.

To put things into perspectives the following figures of total mortgage lending over the years were given:

Pre-crisis (2007) – £364bn

2010 – £135bn

2011 – 141bn

2012 – £143bn

2013 – Forecast of £156bn

This shows a drastic fall in lending. Net lending (lending less repayments) has fallen down by 90%. The number transactions have fallen down to half the levels pre-crisis. This is because the people are nervous about the national and their personal economic situation. The interest rates are one of the only factors holding house prices up at the moment.


The talk ended with discussion on questioning the government’s role in encouraging the market through the introduction of schemes like Newbuy and whether the government would rather have people renting rather than being home-owners.  To read further on this area please see Mr Boulger’s blog or his article on ‘Yet more lies, damn lies and seasonally adjusted house price statistics.’  Thank you to all those attended. Any further discussion on this topic is welcome.

Next week in Economics Society, Professor Ngaire Woods from the University of Oxford will be presenting on ‘When politics and economics clash: regulating the global economy since 2008’.  


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