While a house is worth what a buyer is prepared to pay for it, a host of algorithms are being used by websites like Zoopla to calculate house prices in an extremely scientific manner.
Zoopla’s house price tool is a popular way for homeowners to find out what their home is worth, but lots of data on property prices is produced by many other sources each month, including Rightmove, major mortgage lenders, the Land Registry, and the Royal Institution of Chartered Surveyors (RICS).
The results vary considerably as each one uses different data and methods to create their figures, making it hard to compare the information, which can come from estate agent data, property valuer figures, approved mortgage statistics, or the actual price paid for a house.
While this may seem confusing, the findings can be useful if you are aware of why each result is different.
We look at the methods used by:
- Zoopla Ltd
- The Nationwide and Halifax building societies
- Other providers of house price indices
- And get an estate agent’s opinion on their usefulness
How Zoopla assesses house prices
Produced each month, Zoopla’s UK House Price Index Report is an analysis of property market data and annual price growth figures. It lists every UK home and valuations draw on available data for a given area. A proprietary algorithm calculates value estimates by analysing sold house price data and house characteristics in local geographical areas, and the estimates are constantly updated.
Zoopla’s free online house price estimates are created using an algorithm that uses sources including price data from HM Land Registry, Royal Mail, Ordnance Survey, and Registers of Scotland.
Zoopla clearly states on its website that while the more information it has, the more accurate its house prices figures can be, it’s still an estimate.
They explain that while the figure they come up with is a good estimated price, it can’t consider factors such as renovation work to a house, which can only be assessed by a local estate agent and may add to its value.
An estate agent can also take into account the house’s key features and see how well it’s been looked after as well as having local knowledge about the area. A computer algorithm can’t assess factors such as the amount of natural light a house gets, whether it has a south-facing garden, the view, noise levels, roads, and neighbours.
Zoopla recommends having three estate agents assess how much your home is worth and compare their findings – an agent can also advise on the best ways to improve your home to maximise its appeal.
Richard Donnell, Executive Director of Research at Zoopla Ltd. said:
We update our estimates every month based on the information we get from regulated data sources and take into account what we know about your home, and similar properties nearby.
We utilise information from sold house price data from HM Land Registry and Registers of Scotland, energy performance certificates (EPCs) as well as live for sale and to rent property listings and address data from Royal Mail and Ordnance Survey.
Our estimates are powered by the Hometrack automated valuation model (AVM), the UK market leader with 17 of the top 20 UK mortgage lenders using our AVM as an integral part of their processes.
Our estimates do not include renovations or internal fittings and as such, our agent customers are best served to provide accurate valuations should your property have benefitted from significant refurbishment.
However, Zoopla’s automated estimates are a useful starting point to understand the potential value of your home. For an even more accurate picture, we suggest using other tools on Zoopla like exploring current listings in your area and sold prices, as well as advice from your local agent who will take into account renovations and internal fittings and bring local area expertise.
At Zoopla, we’re constantly striving to further improve the accuracy of our estimates and they will also get more precise as more properties are sold in an area.
Rightmove’s house pricing method
With a property search displaying 1 million houses at any given time, Rightmove has a huge amount of information to base its estimates of house prices on. It produces the Rightmove House Price Index by assessing all new properties added to the website – which means around 90% of all available new properties. Not surprisingly, Rightmove states that this puts them in a strong position to comment on house prices.
Their index is based on a reliable methodology based on factual information about actual prices of houses currently on the market. The house price estimates are based on the asking prices of properties for sale now on their website, not actual sold prices.
According to Rightmove, it’s the biggest, most up-to-date monthly sample of any house price publisher in the UK, therefore very reliable. Their House Price Index is compiled from the asking prices of properties for sale via over 13,000 estate agency branches listing on Rightmove.co.uk.
A Rightmove spokesman said:
Rather than being a survey of opinions as with some other indices, it is produced from factual data of actual asking prices of properties currently on the market.
The sample includes up to 200,000 homes each month – representing circa 95% of the market, the largest and most up-to-date monthly sample of any house price indicator in the UK.
The Index differs from other house price indicators in that it reflects asking prices when properties first come onto the market, rather than those recorded by lenders during the mortgage application process or final sales prices reported to the Land Registry.
In essence, Rightmove’s Index measures prices at the very beginning of the home buying and selling process while other indices measure prices at points later in the process. Having a large sample size and being very up-to-date, the Rightmove Index has established itself as a reliable indicator of current and future trends in the housing market.
Nationwide and Halifax indices
House price indices are compiled by the two biggest mortgage lenders, Nationwide and Halifax, based on the value of the mortgages they approve each month – their figures come from sales based on a mortgage, cash house purchases are not included.
The price is recorded as agreed at the point when the mortgage is granted, not the point of sale, and it uses a smaller sample size than Rightmove.
According to Zoopla, both account for 8% and 20% respectively of the 75% of sales financed by a mortgage.
A Nationwide spokesman explained:
Nationwide Building Society’s House Price Index is calculated using data at the mortgage approvals stage. The purchase price of a house depends on its characteristics, including its physical properties, such as its size and number of bedrooms, as well as the type of neighbourhood in which the house is located.
Using data from approved mortgages, we use a statistical process called hedonic regression to relate observed combinations of these characteristics to the house purchase price. Using this information, we can estimate how much a house with a given set of characteristics would be expected to cost.
In particular, we use a set of characteristics that describes the ‘typical’ UK house in order to track the value of a typical UK property over time. This typical house does not physically exist, it is an ‘average’ house across all the characteristics that are included in the model.
This method is repeated on data sets at different points in time and changes in the price of this typical house reflect only the price changes over the same time periods and not the mixture of properties sold in the current or previous periods.
The Nationwide index is calculated based on owner-occupier home purchases involving a mortgage. Buy-to-let and cash purchases are not included. Factors affecting the price of a house include location, neighbourhood, house type, number of bedrooms, and whether it is a new build or not. The monthly sample size varies depending on the level of mortgage activity.
The Halifax House Price Index
This is the UK’s longest-running established monthly house price series with data going back to 1983 which enables it to produce a `standardised’ house price.
Changes in property prices are analysed on a like-for-like basis over time. The index calculates the annual change figure by comparing the current month’s (seasonally adjusted) figure with the same month the previous year.
Other house price indices
The Hometrack UK House Price Index
This differs from other indices as it analyses market trends at a city level, looking at 20 cities, regions, and nationwide. They produce monthly index series for 64 cities by publishing results for 20 cities, selecting the latest 10 cities in England and the main cities in Scotland Wales, and Northern Ireland, with the remainder selected to provide geographic coverage of housing and economic characteristics.
It aims to show the actual performance of the market by using pairs of price points for houses that have sold more than once. This repeat sales-based methodology allows a comparison of price change on a like-for-like basis over time.
Hometrack uses the hedonic or multivariate regression model used by Nationwide and Halifax. It uses data from sales recorded by the Land Registry `Price Paid’ data set and similar data from the Registers of Scotland, plus mortgage valuation data.
As the volume of housing stock in each geographic area varies, the indices are weighted accordingly. For accuracy, to give up-to-date house price information all data is obtained monthly.
The UK House Price Index (UK HPI)
This is jointly produced by HM Land Registry, Land and Property Services Northern Ireland, Office for National Statistics (ONS), and Registers of Scotland. It includes all residential properties bought for market value in the UK; however, when consulting this data, be aware that there can be a 3 month time delay as sales only appear in the UK HPI once the purchase has been registered, so it can’t be totally current. The UK HPI is calculated by the ONS using the hedonic regression model using various sources of property price data.
Members are contacted each month to assess whether they are seeing prices fall or rise in their area and a percentage is created from these findings. This method reflects market mood rather than actual sale prices.
An estate agent’s view
National data struggles to take account of location and condition, the key factors in pricing, perhaps making all these methods unreliable. A local estate agent will value your home for free and may well get closer to establishing what your home is worth.
Estate agent Dan Lewis of Freeagent247 said:
One of the first things a consumer may do when they are thinking of selling is Google their address and they very quickly find themselves down the rabbit hole of Rightmove, Zoopla, and similar portals which provide estimations on what their property may be worth.
So, in turn, it’s one of the first things I discuss as an agent when visiting them, as it always comes into the conversation. And if it doesn’t, I will bring it up as if a vendor hasn’t done this – then a buyer certainly will!
I will explain that Rightmove etc. have not actually visited the property, so cannot see its condition or what has been spent on improving it, so whilst it may act as a good starting point, it doesn’t get to the crux of what the property is worth, whereas an estate agent can really fine-tune where an asking price may actually be.
How much is my home worth?
So, do you think that everything is down to location, condition, and individual appeal when calculating an accurate sale price, or do today’s algorithms have a role to play in working out a home’s value?
Let us know your views in the comments box below.