How sluggish are house asking prices?

House prices have been reportedly dropping for a while now, with prices in April 2012 being 0.9 per cent below the prices of the same time in 2011 (Halifax reported). This figure however only contains information on those houses that were eventually sold (therefore the drop is in the price of sold houses). This is a selected sample and may not fully represent tendencies in the housing market. Rightmove publishes an interesting index on the asking price of houses on the market, which provides a handy tool for the economist to discuss how demand and supply works in the housing market and could maybe even reveal some information on the stickiness of house prices.

A price index of sold houses (e.g. the Halifax house price index) can be thought of as the demand side price, and the price index used by Rightmove as the supply price. The gap between the two shows how far away the market is from the market clearing equilibrium. The intuition is simple, if the asking price is higher than what the demand side is willing to pay, there is insufficient demand and some houses get stuck on the market until prices are reduced.

It does not of course mean that any asking price is too high; even at high price there is some demand (i.e. people with high reservation prices). Similarly, some asking prices may be outright small enough for there to be immediate demand for. What the comparison of Rightmove and Halifax indices shows is that there is a large proportion of houses with asking prices higher than what the demand side is willing to pay for (in May 2012 the UK average asking price was £243,759, and the Halifax average UK sold house price for the same period was 161,785). This rather large gap seems to imply that dominantly the cheaper properties are sold, therefore the sold price index is based on a selected sample of these cheaper properties.

What is more interesting is how the gap has been changing over time. Using data from Rightmove and Lloyds, the figure below plots the gap between asking and sold price and the trendline shows that for the last two years this gap has been increasing. The question is: does the increase in this gap mean an increasing proportion of unsold houses?

To help answer this question, another piece of information is borrowed from Rightmove: the average time houses spend on the market before they are sold). This is also plotted on the figure above, which reveals that for the last two years, the average time is around 90 days with some seasonal fluctuations (high in December, low in the Spring), but overall remaining around the mean. This suggests that the gap between the asking and the selling price may not have an impact on how long it takes to sell houses, implying that sellers are quicker in adjusting their asking price as the gap increases (i.e. they may have a quick shot at asking for more but if they fail to sell they become quicker in adjusting their prices and so they manage to keep the 3 month average selling time).

The bottom line is: house prices are sticky downward (we already knew this) but their stickiness is not constant. This may be a new piece of finding as it suggests that the sluggishness of consumer behaviour changes over time. This is probably driven by the fact that there is a seller-side expectation that houses have to be sold within around 3 months from entering the market. Sticking to this 3-month rule seems more important than sticking to a higher asking price.

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