How to figure out if house prices are really falling

Buying a house can be a tortuous business: Rightmove estimates that it took 150 days to complete a sale in 2022 on average. This makes tracking the health of the UK property market a challenge: it takes five months for a property sale to go through, and even longer for house prices to appear in official statistics.

These long delays leave us with limited visibility – a problem when house prices matter in real-time. In an environment of rising interest rates, large mortgages become unaffordable as fixes roll off – both for would-be homeowners and households struggling with repayments. What’s more, the Bank of England fears that when house prices fall, homeowners risk negative equity and are more likely to cut down on spending as a result. 

Backward-looking indicators 

Two of the most important official house price measures operate with significant time lags. First, the Office for National Statistics house price index (ONS HPI), which uses Land Registry data to calculate monthly house price changes. Crucially, sales only appear in a release after they have completed, and are not published until six weeks after that. 

Annual house price figures are an even more lagging indicator. According to the ONS HPI, the 12 months to December saw UK house prices increase by 9.8 per cent. This sounds like a promising figure, until you consider that it was driven by strong growth earlier in 2022. The same release showed that house prices fell by 0.2 per cent between November and December last year (see table). 

Although it may not be timely, the ONS data is drawn from a huge number of transactions and reports sold prices (rather than advertised or asking prices). This makes it an excellent barometer of long-term house price trends. 

HMRC transaction figures are also based on completed sales and have similar time lags to the ONS HPI. This can, again, diminish their usefulness over the short term. February’s release noted that towards the end of last year mortgage and interest rates increased, but that we were only recently “starting to see the impacts of those changes within these statistics”. 

Nevertheless, official transactions data is a useful gauge of housing market activity: there were substantial decreases in the spring of 2020 as the pandemic hit, followed by peaks in 2021 as temporary cuts to stamp duty were introduced. 

State of play indicators 

Alternative indicators can provide a more up-to-date snapshot of the state of the housing market. The Rightmove house price index samples around 95 per cent of newly marketed properties in (almost) real-time. It is worth flagging that the index uses asking prices. Although these are a leading indicator of future sales prices, they do not always reflect the price that properties eventually sell for – especially in a falling market. Rival Zoopla offers a similar monthly update. Its latest figures showed buyers were accepting average discounts of 4.5 per cent on asking prices, the highest in five years.

Halifax and Nationwide also produce house price indices based on their own mortgage approvals. This data is fast, typically published around a week after the reference period. But here, methodology matters: Nationwide excludes buy-to-let properties, whereas Halifax includes them. Mortgage approval indices also naturally leave out transactions completed as cash purchases – this means that around 30 to 40 per cent of sales are excluded from these data sets. 

Forward-looking measures

Then, there is the million-dollar question: where are house prices heading next? Research teams at property companies such as Knight Frank and Savills produce house price forecasts, as do economic consultancies that are interested in the housing market’s outsized impact on the UK economy.  

The Office for Budget Responsibility (OBR) fiscal watchdog also produces forecasts for house prices and transactions, designed to mirror the ONS and HMRC measures. Crucially (as far as the OBR is concerned), these forecasts can be used to calculate expectations for stamp duty, capital gains and inheritance tax receipts. 

February tax data from HMRC revealed that inheritance tax receipts had reached £5.9bn, up £0.9bn on a year earlier, with rising house prices playing a part. Rachael Griffin, tax and financial planning expert at Quilter, noted that “even those who may not consider themselves wealthy could now end up paying inheritance tax as their property value has grown so much”. Inflated house prices coupled with tax threshold freezes have proved lucrative for the government this year.