Falling mortgage approvals indicate gloomier times

Nationwide reported house prices were up in September but I can’t say it gets me excited. 0.1%. This on the back of the latest house prices from the Land Registry, which showed a 0.3%rise in August.

House price indices are funny things. 

People like an average price, representing what is going on overall around the country but determining one is not easy, especially in times like this when there aren’t an awful lot of transactions.

You could add up all the house sales around the country and divide by the number of sales (easiest thing to do) but then the average price each time is biased by the number of sales at the higher end of the market.

The higher proportion of sales at the higher end of the market, the higher average price you end up with and this could have been especially problematic over the past year given that higher deposit requirements mean that the rise in transactions has mainly been those who don’t require a deposit. i.e. those people with a house moving to another house.

The market has mainly suffered at the lower end especially within flats, which are generally lower price than houses.

Furthermore, there is another problem regionally. Homes in the South are generally higher than in the North so if a higher proportion of sales are in the South, as they have been over the last year, then that would bias the average house price.

The key organisations that produce house prices weight their samples of housing transactions by the region and the type of home. However, then you have a problem about what to use as a weight. You could use value of property or volume of transactions and generally, these are used, but then you still end up with a certain bias towards areas where there have been more, and valuable transactions, i.e. Greater London/South East, raising the average house price.

Nationwide and Halifax house price indices are obviously based upon their samples of transactions, which are relatively large samples even in these times. The Land Registry takes all housing transactions but is published later. Given the uncertainties that are around at the moment and the margin of error in determining these indices, I wouldn’t personally take much notice of a marginal fall or rise, especially on a monthly basis.

More of interest at the moment is mortgage approvals, which is a forward indicator of demand. Demand seems on the wane and mortgage approvals fell for the fourth month in a row. Whatever the small rises and falls in house prices in recent months, the continuing fall in mortgage approvals doesn’t bode well for the housing prices in the next six months.