Comparing apples, pears and house prices

Continuing his series of property articles, estate agent Trevor Cooper explains why statistics alone cannot provide a true reflection of the state of our housing market.

The number of flats and houses sold in Guernsey has increased annually for the last three years and this trend looks likely to continue, with something like 180 sales during the first three months of 2012.

And yet, that number is slightly down on the previous quarter and down on the same quarter last year.

But of those 180 properties, 83 were sold in March alone – an increase of 55% on the number of sales in February and an increase of 70% on February 2011.

This randomness suggests statistics alone cannot truly reflect the state of our housing market. For example, has the number of house sales increased because prices have dropped? Does this reflect the market as a whole or only an over-heated portion of it? And what effect does this have on the average house price in Guernsey?

The truth is, Guernsey's housing market is not large enough to make accurate comparisons month by month and seasonal variations mean that no successive quarterly periods are the same.

Yearly comparisons take a comprehensive view but may not take into account changing market forces such as the availability and cost of mortgages, the cost of living, employment figures or new developments flooding the market.

And yet the average house price in Guernsey is regularly calculated amidst the turbulence.

Understandably, it is necessary for the States to track the rise and fall of house prices and the Policy and Research Unit actually produces a wide range of information on the island's housing stock and property transaction prices on a regular basis.

Conclusions will inevitably be drawn when the number of houses sold and the prices paid are measured against previous figures.

If the total amount paid for property in one month, say February, is less than the total amount paid in January, then it could be assumed that the average house price has fallen. But if the amount paid in February was for fewer properties than in January then the average house price could be the same or even have risen.

The method of calculating an average has an important bearing. A quick maths lesson for those who did not pay attention at school: the three principal methods for measuring averages are mean, mode and median.

The 'mean' method totals the prices paid for all the houses sold divided by the number of sales, as illustrated in the unstable example given above. The 'mode' is the house price that occurs most often, a marvellous method for something other than studying house prices, and the 'median' – favoured by the analysts – is the middle figure between the lowest house price and the highest house price paid over the period in question.

In using the median method, the analysts understand that uncommonly low priced or exceedingly high priced sales will affect the average dramatically. The process commonly known as topping 'n' tailing is used to omit the highest and lowest properties, regardless of their prices.

A new system of weighting was also applied to different types of property from last year onwards to reduce volatility in the figures. The method takes into account the prevalence of each of seven types of accommodation, so that statistics are not skewed by minimal sales.

Making exclusions and categorising types is used to sharpen accuracy but, consequently, is the result manufactured rather than extemporary?

The building of 90 flats in La Charroterie witnessed 65 similar priced flats being conveyed in one day during a special sitting of the conveyancing court on 2 October 2002. Millions of pounds changed hands, yet those sales would have been excluded when calculating the average house price at the time in order not to unbalance the averages, exposing a flaw in the system that the present weighting system would also have to take a view on if ever repeated.

There are also occasional instances, such as only last month, when a local market property was sold for over £2m. That alone is unusual and could affect the average house price without topping 'n' tailing, except this particular property was exchanged for another local market property priced at something like £3.6m., making it possibly the most expensive local market property ever.

This potentially record-breaking price, and the price of the house it was exchanged for, could distort the topping 'n' tailing process depending on the number of exclusions made.

This is compounded at the other end of the spectrum when fewer lower-priced properties are sold. This has happened regularly in recent times as first-time buyers have struggled to raise the deposit needed to secure a mortgage.

The sale of fewer lower-priced properties shifts the fulcrum (first maths, now physics) and the median average rises disproportionately. Statistics would show the average house price having increased alarmingly when, in fact, the price of a typical three bedroom semi-detached house or a 1,400sq. ft bungalow with front and rear gardens, or indeed most properties, may not have altered by that amount, if at all.

There is further disparity when the ownership of a property is transferred by the sale of all the shares in a company that owns that property. Perfectly proper, but unaccounted for when collating the number and value of sales on both the local and open markets.

The breakdown of last quarter's house sales can gladly be left to the analysts, not out of indifference or ignorance but simply because other influences and market forces – not just the number and value of properties sold in any one period – need to be taken into account.

This is not deriding the fastidious and necessary work of the analysts, but what is purported to be Guernsey's average local market house price is actually a subjective middle number, carefully calculated but from a limited and fluctuating source – accurate to the penny but not necessarily close to what it is claiming to be – and property owners and house hunters alike need to be aware of this.