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Everything You Need To Know About The House Price Index


What is the House Price Index (HPI)?

House Price Index – HPI- is an indicator that measures the changes in single-family home prices across regions. This tool shows us in which areas the home prices are increasing or decreasing and can be used to estimate its future price. With the right guidance, HPI’s can help us in deciding the right time to purchase a home.

HPI’s are often used by economists and financial analysts to analyse the long term trends and check what is happening in the housing market. The predictions made by them also have an impact on the prices and market. The lender sits down with the home buyer to explain its implications as it affects the mortgage costs. Affordability depends on the home prices, and if the home prices are higher, it raises the loan-to-value (LTV) of the mortgage, one must borrow to get the home he wants. The LTV is used as a measurement of risk factor by the lenders to qualified buyers. The higher the LTV, the more mortgage costs are likely to be. HPI’s tell us the most advantageous region to move in at that moment. From buying the right type of home to selling the existing property, everything can be measured using this indicator. Since HPI’s are not easy to read, it is always best to speak with a qualified lender or financial planner when there is a need to use this indicator.

What does the House Price Index of a country measure?

With a proper understanding of the House Price Index (HPI), one can estimate whether or not a home is going to get costlier or cheaper. These estimates together have an effect on how much mortgage one will be paying on their housing loan and for how long.

In American states, HPI is calculated by the Federal Housing Finance Agency (FHFA). This agency has it’s specialising in measuring the changes in home prices across the country. HPI is calculated using the data about residential property sales that are made through direct cash or money borrowed through a housing loan.

A reliable source of information on ‘House Price Index’ for Major currencies

Housing Finance Agency publishes the HPI Index for the US and other major countries as well.  Also, there are realty developers who watch this data and keep their customers always informed of the prices of homes in their areas. We can also find the data from business magazines, and economists use this indicator to understand the growth prospects of the nation. Here are a few HPI’s for some of the biggest countries in the world:

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/housing-index








What do traders care about the House Price Index and its impact on the currency?

HPI is essential not just for the home buyers, but also for the policymakers as well. Economists and Fund Managers often use HPI to analyse long term trends in consumer behaviour and financial situation of the country. It is for this exact reason currency investors keep a watch on HPI along with Consumer Price Index (CPI), Gross Domestic Product (GDP) and unemployment figures. Experts say that HPI can predict inflation. Inflation, in turn, is an important factor used by Central Banks in framing policies and fixing interest rates. When inflation falls too low, the central banks reduce the interest rates to bring equilibrium in prices and on the flip side when inflation is high; interest rates are raised.

If the interest rates are raised by Central Banks, the common man keeps most of his money in the banks under the expectation of higher returns and reduces spending. But on the other side, raised interest rates create a demand for that currency in the foreign exchange market. The reason is obvious. If anyone is getting high interest for a particular currency, then he/she is more likely to invest their money there. As a result, the demand and value of that currency usually rise due to an interest rate hike. This is why the country’s inflation figures matter a lot for Investors. And because HPI determines inflation, each HPI release is usually followed by volatility in demand for the currency. HPI is also influenced by many things like local politics, natural disasters, market fluctuations, foreign country policy changes, and more. Hence, HPI affects the economy and subsequently, the value of the currency.

Frequency of the release

The HPI is a quarterly release by the Housing Finance Agency. However, if one needs to study the data on a month on month basis, then this shall be available with realty developers and analysts. But the official release is only by the Agency which is published every three months. The Housing Agency also releases every year to compare past trends with the present. Quarterly results are used by short term traders, whereas yearly data is used for making long term investments.

The Bottom Line

The HPI provides a reliable estimate for average prices and appreciation of home prices but may not very specific for measuring financial strength as calculated by other economic indicators. The HPI is based on transactions made from buying houses, where transactions are classified as small, medium, and large house transactions in different geographical zones. We can also estimate the change in the purchasing power of people to understand if people are getting richer, which is a consequence of high wages due to good economic growth. If there is an economic slowdown, then automatically prices of the house will come down, and salaries will also be reduced.


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