The House Price Predictor
At HousePrices.uk.net we have developed a new housing market predictor that provides a robust and timely view
of the UK housing market.
It determines the current level of house prices and the rate of house price inflation by combining measures
of both house prices and estimates
of house price inflation (HPI) derived from the BoE
mortgage approvals for house purchase figures along with
projections from historical data.
Kalman Estimation
The state estimation X = (price, hpi) is done using a Kalman filter, and it avoids the problems caused by trying to
measure small changes in noisy price data over short times. We think that the Kalman filter approach combining both price
and HPI/approvals data is the best way to
get an accurate and timely handle on what's happening in the housing market.
A useful feature is its ability to make good a priori estimates of the Halifax prices.
Good short term predictions follow naturally by projecting the much more stable trends in the mortgage approval figures.
Also included is the house price trajectory implied by the currrent buy & sell prices from financial spread betting
data (Cantor Spreadfair, house price spread betting).
Updated 6th November 2008 
Figure 1.
House Prices. Comparison of the Halifax seasonally adjusted house prices series and the Kalman estimate based on BoE mortgage approvals. Also included are the spreadbetting futures for the Halifax Quarterly Index.
Figure 2.
House price inflation HPI. Comparison of the Halifax seasonally adjusted HPI (monthly series, equivalent annualised) and the
Kalman estimate based on the BoE approvals data. This series leads the YoY figures by about six months.
Figure 3.
Annual change in prices YoY. Comparison of the Halifax YoY and an estimated YoY using the Kalman HPI shifted forwards by six months, i.e. the red line is produced six months before the blue line is published and thus serves as a predictor.
The graph allows you to estimate the degree to which the predictor is under- and over-shooting at the peaks and troughs.
Figure 4.
The Kalman estimator also extracts the neutral level Q0, i.e. the number of monthly approvals that correspond to zero HPI.
Prior to mid-2006 this sat at around 80-85k, but more recently jumped to about 97k indicating that it took slightly more approvals to drive the same amount of HPI.
Hovever, in 2008 it is reverting as the supply of mortgage credit is restricted.
House Price Spread Betting
Several spread betting exchanges offer trades on the future value of a house price index, e.g. Cantor Spreadfair offers
speads on the Quarterly Halifax House Price index. The bets settle on the outcome value of the index, and one presumes that
the average of the buy & sell prices would
represent a rational expectation of the future path of house prices (see Fig 1).
Last updated: November 2008.
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