If you have arrived at this page expecting a couple of sentences defining what the "Average House Price" is and how it applies to you, prepare for a shock.
Put down your coffee, sit down in a quiet, darkened room and prepare for the harsh reality about one of most frequently cited phrases in recent times and why it is the most useless piece of statistical data since someone worked out how many particles of fog will fit on a teaspoon.
In the interest of balance and clarity – I will get a couple of things straight before we start (apologies for the use of basic level arithmetic to illustrate the point here, but it would seem that large sections of the banking and PR world seem to conveniently forget that most people have been to school at some point).
"Average" – a figure derived by taking the total value of a list of numbers, and dividing it by the number of numbers in the list.
- My list of numbers is 1, 5, 8, 9 and 13.
- The sum of the list is 36
- I have 5 numbers in my list so, to calculate the average I divide 36 by 5 which is 7.2
Whilst the example is fine when it comes to a question in a maths exam, if the numbers above represented shoe sizes and Nike put out a press release telling you all about what size trainers would be best for running the Olympic 100 meters in, the calculation becomes as useful as a roof rack on a helicopter.
"House Price" – in the real world I would propose that the term be clarified with respect to the context in which it is being used, as demonstrated here in a few theoretical exchanges of conversation between two friends, one of which is selling his house, and the other who is thinking about buying it.
Person 1: My house is for sale
Person 2: Really old chap! How much are you asking for it?
Person 1: My "asking price" for 200,000 of your finest Pounds
Person 2: Hmm – I believe you should avail yourself of a trip to the nearest party shop and acquire a Dick Turpin mask – you'll need it to sell at that price!
Person 1: Ah, but you see I know I will have to reduce it a bit depending on what offers I get.
Person 2: I will give you an "offer price" of 150,000 Pounds now.
Person 1: But the "average house price" is 210,000!
Person 2: And the average shoe size is a 9
Person 1: What's that got to do with price of my house?
Person 2: Exactly the same amount as the average house price has to do with the size of my shoe!
Person 1: I am lost – what do you mean?
Person 2: I am only going to buy one house – not several. I don't care about the average because it has no relevance in this situation – I will either buy your house at a price that suits me and that I am comfortable with, or I won't.
Person 1: Ok – What about 185,000?
Person 2: Great, I will buy your house at that price.
End result being the "Selling Price" is 185,000
The difference and variety of prices throughout the conversation means little until the end when the selling price is reached and the house is actually sold.
The problem I have with the constant reporting of "average house prices" by banks and mortgage companies goes a little further than this though for several reasons:
- The volume of houses bought and sold in the UK each year is considerable and not every bank or mortgage provider has access to every sale
- Many transactions of their own don't even make it into their figures if they don't meet certain criteria either. Examples of this include;
a) The property sale is not deemed to be being sold at "normal" market prices (and guess who decides what's normal?)
b) If it doesn't fulfil every item on a list of their criteria
c) 10 years ago, sales over 1 million weren't included in some statistics either.
In addition to the anomalies in the data itself with respect to what's counted and what's not, there is also the fact that in many cases the numbers used are from mortgages at the time they are approved – not at point of completion. Even if only a small percentage of sales fall through, this will naturally skew the average prices further, resulting in even more inaccurate figures.
Averages, as we all know can be somewhat arbitrary at best – a 3 bed semi in Newcastle is not going to sell at the same price as a 3 bed semi in Oxford – no matter how big your data set might be.
The real definition of "average house price" is pretty simple:
i) A (largely) useless and somewhat arbitrary figure created by banks and lenders with data of their choosing, specifically to create useless, boring press releases for ill-informed journalists to thrash out pointless stories with misleading headlines.
ii) A wholly useless number with which one can create conversations upon when the weather has remained the same for several days.
iii) A figure often quoted by property industry "experts", which in turn are experts in nothing of the sort due to only relying on vague, useless data (which has been spun to create media interest in something that is too expensive anyway). As a result – ill-informed recommendations are then made by said "experts".
The term "average house price" does have the odd use, although it is limited to say the least.
- If you are thinking of emigrating, and in need of a random number to compare costs in different countries.
- If you need to sound as though you know what you are talking about at a dinner party. (Although it might be an idea to know just a little more than the average house price to sound interesting).
At best, average house price statistics provide a benchmark statistic to show change over time and nothing more. The fact that banks, mortgage providers and property "experts" believe these figures are useful for anything in the day to day world of the housing market simply begs belief.
- Tuesday 06 March 2012