House prices in the UK are continuing to soar according to data from the Office of National Statistics (ONS). The average house price reached £275,000 as of December 2021 which is a 10.8% increase from the previous year.
As a result of the pandemic, house prices have also massively fluctuated and are expected to continue doing so over the next year. This is partly due to the supply of properties and the number of property transactions available.
So, if you are currently looking to relocate or sell your own home, it is incredibly useful to have an understanding of the House Price Index to give you an idea of property values and predictions for the property market.
In this article, we will cover what the UK House Price Index is, how it is used and calculated, and alternative measures of house prices.
What is the House Price Index?
The UK House Price Index (UK HPI) is a National Statistic that is calculated using the data from property sales to show price trends and produce estimates for changes in property prices per period. Additionally, it measures the change in prices of residential properties, producing a percentage change that has been calculated over a twelve-month period.
How is property price calculated?
The data used to produce the House Price Index is from HM Land Registry, Registers of Scotland, and Land and Property Serviced Northern Ireland. The data covers the whole of the UK making it an extensive measure of property prices.
The UK HPI is based on a Hedonistic Regression Model which means that the value of the houses can be determined by the characteristics or features it possesses. A regression model provides estimates for the potential value of characteristics such as a garden or an additional bedroom which then allows an overall property price estimate to be drawn up based on the attributes the property has – this is even the case if a property with the specified characteristics has not been traded in the current period.
The average house prices produced by the UK HPI are calculated using a weighted geometric average as opposed to an arithmetic average. An arithmetic average is a sum of a series of values divided by the count of the series of numbers, whereas the geometric average calculates the mean value across a series of data by multiplying the values and finding the root of the number. The geometric mean is generally closer to the median average, which is considered the central value in a dataset.
How is the House Price Index used?
The HPI is a measure of the housing market itself, and it can be used to track changes in the average price of a property based on characteristics or attributes. The UK HPI can identify if the market is preferable for buyers or sellers to give an indication of whether it is the right time to consider moving and buying a new property or selling up.
Additionally, for those buying, the HPI can provide an idea of the potential value of a property which can help plan for the future. For example, those looking to take out a mortgage would benefit from identifying the potential value of a property to give an idea of how long they may want to live in it.
What does the House Price Index currently show?
The HPI has identified a 10.8% increase in the average house prices across the UK from December 2020 to December 2021.
For those looking to buy a house in the UK, the index shows that England remains the most expensive country with an average house price of £291,560 as of January 2022. Wales follows in second with an average price of £206,251, and Scotland is third with an average house price of £180,000. Northern Ireland is the cheapest country in the UK for homes – the average house price is £159,000 which is well under the overall UK average.
London is the region with the lowest annual growth in house prices with an increase of 5.5%, followed by the North East which saw house prices increase by 5.9%. The areas with the highest growth are the South West and South East with house prices increasing by 13.6% and 12.6% respectively.
Is the House Price Index accurate?
The UK HPI is calculated using data from a variety of sources, meaning the coverage is high and includes the whole of the UK. Additionally, the index includes cash and mortgage transactions which give a better representation of the current property market.
Also, the index is based on data that is external to the publisher therefore there is the potential to eliminate bias and to produce an index that is less about the success of mortgage transactions, and more about actual house price trends and average prices.
The UK House Price Index does however have some disadvantages which include:
- Less timely publications of data, potentially leading to a more outdated index
- Not as reliable for predicting house price trends due to the index being based on time of registration rather than sale time, causing delays in the data being reported.
Overall, the index is one of the most accurate out of the indices available and it does give a good indication of UK house prices. It is just worth being aware that it is not the most updated method of identifying trends in the property market.
Alternatives to the UK House Price Index
Aside from the House Price Index, there are alternative indices to be aware of when you are looking for information on house prices in the UK. The reason for multiple house price indices and differences in results is due to the fact some private companies carry out and publish research on house prices using their own methodologies. Below is information on the four main alternative house price indices for the UK.
LSC Acadata Index
Launched by the Financial Times in 2003, the Acadata Index is a monthly issued house price index based on data from property transactions in England and Wales. It is designed to provide a true measure of inflation for house prices. This is achieved by using an “index of indices” methodology which provides the percentage monthly change of the average house price from the current month to the next.
Here is a summary of the LSC Acadata Index:
| Data Source | Transaction count | Coverage | Stage at which transaction is recorded | Methodology | Issued | Updated |
| HM Land Registry price paid data | Approx. 80,000 per month | England and Wales – all transactions included | When the sale is registered | Mix adjustment | Monthly | Annually |
Additionally, the LSC Acadata Index:
- Uses the actual sale prices for properties in England and Wales, including those purchased with cash, rather than mortgage-based prices or asking prices.
- Is updated and released monthly, including the use of new data meaning results are more accurate.
- Is based on weighted arithmetic mean for house prices as opposed to geometric averages as used by the Office of National Statistics.
As opposed to the hedonic regression methodology used by the UK HPI, the LSC Acadata Index uses a mix adjustment methodology that calculates average prices for properties based on their age, property type, and their Unitary Authority Area or London Borough.
Halifax House Price Index
The Halifax House Price Index is owned and run by IHS Market, and is the UK’s longest-running index – it has been operating since 1983.
The data used to calculate house prices is “standardised”, meaning it is not simply based on the simple price averages. The Halifax House Price Index allows for factors that influence property value, which are:
- Location (region) of the property
- Type of property
- Number of bedrooms
- Square footage of the property
- Age of property
- Area classification as set out by Halifax
This results in property values being considered like-for-like which is supposed to provide a fairer index. Additionally, the methodology for the Halifax House Price Index has been updated as of 2019 to:
- Update the data exclusion criteria to now allow for the inclusion of shared ownership property transactions.
- Exclude re-mortgages, transactions for business use, building, capital raising or discounted mortgages e.g. ones that use the Right-to-Buy scheme.
The purpose of the inclusion of shared ownership mortgages was to provide a more accurate reflection of the current property market in the UK, particularly as a result of the increasing amounts of individuals purchasing properties using this method.
Below is a summary of the Halifax House Price Index:
| Data Source | Transaction count | Coverage | Stage at which transaction is recorded | Methodology | Issued | Updated |
| Halifax mortgage lending data | Approx. 15,000 per month | UK- mortgage transactions only | Approval of mortgage | Hedonic regression | Quarterly | Annually |
Nationwide House Price Index
Similar to the Halifax House Price Index, the Nationwide House Price Index uses a hedonic regression-based methodology to calculate property value changes across the housing market. The index uses mortgage data from Nationwide’s own transactions.
Seeing as both Nationwide and Halifax use their own data and only include mortgage transactions, there is a smaller pool of data available, potentially creating biases in the index. This doesn’t necessarily fully represent the housing market as around 30-40% of property transactions are completed using cash – a factor both indexes do not account for.
Additionally, with both the Nationwide House Price Index and Halifax House Price Index choosing to use data from the mortgage approval stage of a property transaction, the data may not be as accurate as the UK HPI or LSC Acadata House Price Index as not all approved mortgages result in a transaction.
The Nationwide House Price Index is, however, mix adjusted which means house prices are analysed and calculated based on representative houses within an area with specific characteristics. These are:
- Location/region of the property
- The type of property
- Number of bedrooms
- ACORN area classification
- Age of property
The aim of this method is to provide a fair assessment of the property value and account for the impact of characteristics on house prices.
To summarise the Nationwide House Price Index:
| Data Source | Transaction Count | Coverage | Stage at which transaction is recorded | Methodology | Issued | Updated |
| Nationwide mortgage lending data | Approx. 12,000 a month | UK – mortgage transactions only | Approval of mortgage | Hedonic regression | Monthly | Every 2 years |
Rightmove House Price Index
The Rightmove House Price Index works differently from the rest of the house price indices as it uses data based on asking prices for properties rather than mortgage approvals or actual sale prices. This means that the index shows market sentiment rather than actual data trends as asking prices are an estimate and do not always align with sale prices.
The index does however cover England and Wales and is based on all transactions which are the same as the LSC Acadata Index.
Summary of the Rightmove House Price Index:
| Data Source | Transaction Count | Coverage | Stage at which transaction is recorded | Methodology | Issued | Updated |
| Properties advertised on the Rightmove platform | Approx. 100,000 per month | England and Wales – all transactions included | Date advertised | Mix adjustment | Monthly | Quarterly |
Summary
The various indices can often produce conflicting results, meaning it is sometimes hard to know which one to consult. Generally, the UK House Price Index is considered to be reliable and it is especially useful for historic data as the sources used span many years and cover the whole of the UK.
Despite not being the most timely, the data provides a better measure of the current housing market due to the inclusion of cash and mortgages.
Finally, the granularity of the UK HPI is superior to that of the other indices with breakdowns for the types of properties, buyer status, property status, and funding status.
