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
We estimate the dynamic state X = (price, hpi) of the housing market using an extended Kalman filter (EKF) as this avoids the problem of trying to
measure small changes in noisy price data over short periods of time. We think that the Kalman filter approach based on 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 spreadbetting (Cantor Spreadfair, house price spreadbetting) and residential property derivatives trading (Tradition, Future HPI).
Updated 31st August 2010 (BoE Approvals)
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. During 2008-2009 it fell sharply as the supply of mortgage credit was restricted but now in 2010 is showing signs of reverting.
Approvals (green line) dipped briefly below the neutral level (red line) at the end of 2005 and collapsed below it beginning Q3/2007 and then particularly severely on restricted credit until the mini-boom in 2009. Unusually, the lack of supply of properties for sale (non-punative SVR rates, introduction of HIPS) in 2009 allowed a price recovery on very small volumes of sales which is now coming to an end in mid-2010 (helped by the change in stamp duty at the end of 2009.)
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 Figures 1 and 2).
Cantor Index closed its online betting exchange Spreadfair on 1st December 2008.
we have added the most recent bid/ask prices taken on 30th November 2008 to the above graphs.
New in January 2009: We are now adding data from Tradition Property Derivatives.
Last updated: 31st August 2010
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