How does London affect house prices?

By THIS IS MONEY
Updated: 08:48 EST, 8 January 2010

House price reports say prices rose in 2009, but refer to London pushing up the market. How much effect does London have on a house price index?

Simon Lambert, assistant editor at This is Money, replies: Reports from Nationwide, Halifax and now the self-claimed more accurate FT Academetrics house price index have all shown property prices rising in 2009.

Nationwide and Halifax showed prices up by 5.9% and 5.6%, respectively, last year, while the FT has recorded a 4.2% increase.

(It is worth noting that Halifax's official figure for 2009 house price inflation was 1.1%, as it compares quarterly figures to produce its result. The 5.6% rise is a direct December 2008 to December 2009 comparison.)

Of these reports, the Halifax and Nationwide house prices data comes from their mortgage approvals and is UK wide, while the FT data is for England and Wales and is compiled using number-crunched Land Registry figures.

Despite their different use of data, the overwhelming commentary on most house price reports has been that it is London leading the way since the rebound in the property market began last spring.

But just how much does the capital distort the figures?

The FT index, compiled by Acadametrics, provides a substantial amount of information on how it is compiled. Handily this also includes a table showing the full effect of London on its figures.

We can see that prices ended 2009 up 4.2% on the FT Academetrics index when London is included – strip out the capital and prices were 3.4% up on the year.

House price tables: What the rival reports say

Considering the supposed London focus of the property revival, on the face of it this does not seem a huge boost. However, the overall figure for England and Wales, including London is 23.5% higher than that excluding London.

Furthermore, while the data shows what happens when London is removed from the house price index, it does not also strip out the commuter belt of the South East surrounding London. This area tends to move in line with the capital and could be massaging the figures further.

A look at the table below shows the changing effect of London on the figures and how the capital since 2005 has tended to perform better than the rest of England and Wales. The size of this gap fluctuates substantially, however, and this snapshot is only over a short period and London has in the past performed worst than the rest of the country.

What is clear from this year's property rebound is that house price statistics can only really tell one side of the story.

If you own a good property, with broad appeal, in a popular area anywhere in the country then you are likely to be in a better position if you decide to sell than you were last year. But if your property is less desireable, not quite in the sweet spot where everyone wants to live, or only appeals to a niche section of buyers, selling could still be a problem.