How are house prices calculated?

You’re searching for a home, a place of your own, a roof over your head. You want a place where you can shut the door behind you and properly relax. You’re excited to get going. But one thing has you baffled. How are house prices calculated? And what factors have an impact on the prices of homes for sale? This article reveals all about the House Price Index, how house prices are calculated, and where you can go to investigate house prices. By the end of it you’ll be your own expert in everything that makes property prices go up and down. And all that puts you in a position of power and confidence. Read on for the full story.

What is the house price index?

The UK House Price Index is a National Statistic revealing changes in the value of residential properties in England, Scotland, Wales and Northern Ireland. It also shows changes in their value. The Index uses real cash and mortgage property sales data from residential housing transactions, including local, county and regional data from England and Wales since January 1995, Scotland since January 2004, and Northern Ireland since January 2005. It also includes data from local authorities and London boroughs. 

Because it’s based on a formal ‘National Statistic’, and has been since it was founded in 2018, the Index is supposed to meet the highest standards of trustworthiness, quality and value, as well as complying with the Code of Practice. Produced by HM Land Registry, Land and Property Services Northern Ireland, and the Office for National Statistics and Registers of Scotland, it covers every residential property bought for its market value in the UK.

Because the UK House Price Index is based on completed sales, right at the end of the buying process, it isn’t as up to date as some UK house price indices. It doesn’t take advertised or approved prices into account, either. But you can break it down to local authority level, then down even more to reveal property types, the status of buyers, how they funded their purchases, and the property status.

All this makes the register a good source of information about the changes in house prices in the UK. In May 2022, for example, it revealed average house prices had gone up by 0.3% since February 2022, with an annual price rise of 9.8%, making the average price of a home in the UK £278,436. There’s also data for each country, broken down by region, plus repossession sales, average price by property type, building status, buyer status and funding status.

How are house prices calculated?

So what are the different factors influencing the price of homes in the UK? For a start, home buying falls under the basic economic theory of supply and demand. If there’s a high demand but not enough homes to go round – which is exactly what’s been happening in the UK for decades – prices shoot up. If there’s a low demand but a good supply, prices fall. 

Economic growth is another factor. Demand for housing depends on people’s income. When the economy grows and people earn more, they spend more on houses. This pushes demand up, which naturally restricts supply. The effect is so noticeable it has a name – ‘income elastic’ – where better pay means people spend a bigger proportion on homes. The opposite happens in a recession, where falling pay and lost income means fewer of us can afford to buy, and some of us might even see our homes repossessed. High unemployment makes things even worse and a lack of confidence during harsh times puts people off buying in the first place.

Interest rates have a profound impact on house buying. Most of us are on a fixed income. When we take out a mortgage, probably the biggest loan we’ll ever take out, and the interest rates go up, so do our repayments. This naturally dents consumer confidence, leaving people feeling they’d rather wait to buy until things calm down and they can have a bit more confidence about what the future holds. 

Mortgage availability also has a serious impact on house prices. Right now, as the UK economy tanks, mortgage lenders have removed around 1000 products from the market, leaving potential buyers high and dry with a lot less choice, sometimes perhaps no choice at all. The dramatic slump in demand we’re likely to see as a result will probably force house prices down.    

Where can you look to investigate house prices?

Next let’s explore the places you can go to investigate housing prices. First, the Land Registry. It registers the ownership of land and property in England and Wales, giving you the chance to find useful insight into properties even when you don’t own them. You can simply search by address to get a property summary including the address held by Royal Mail, a property description, the type of ownership, plus any ‘restrictions’  and ‘easements’. You can buy a copy of the title register, which includes who owns the property, and how much it was last sold for. 

Historical data from property investors is really handy as well, revealing what a place you’re interested in has sold for in the past. Rightmove is a good source of historical house sales data. Use it to track down homes like the one you’re looking to buy, which gives you the inside knowledge you need to decide whether those you’d like to view or make an offer on are priced fairly compared to others like them. Then there’s the Zoopla Heatmap, which reveals average property prices across the UK based on their own estimates. 

Rental prices can also give you clues. If the sale price of a typical house in an area slumps, buy to let becomes more popular, the supply of houses for sale shrinks, prices rise, and the supply of rentals rockets. If the sale price of a typical house rises too much compared to the rent for the same kind of home, the opposite happens. What’s happening in the area you want to buy? 

Basically, the more sources you use, the better you’ll understand the housing market in the area you want to buy.

Be your own house price expert

Now you know how house prices are calculated, you have the insight needed to make sure you don’t pay over the odds for your dream home. We can help you identify the perfect place to set down roots, live your life, and be happy?