Does Dubai need a realty price index?

Dubai has been criticised by some investors and property analysts for failing to produce what, in Western eyes, is "evidence" of its apparently buoyant market.

This is why recent figures showing an excess of demand over supply in Dubai, even after a decade of construction, are proving a comfort to investors and a slap in the face for international sceptics.

The continuing lack of an authoritative price index to measure capital appreciation of residential and commercial property, however, means investors must still rely on less tangible indicators before putting money into a Dubai scheme. For many, the promise of a city aiming to be a world leader in tourism, air travel and business is enough to persuade them to invest. For others, figures to support the promise would be helpful.

Yet while observers from outside the Gulf might nod wisely as people bemoan the lack of an independent index, it is possible to swing too much the other way and become blinded by a sandstorm of statistics.

That may be what's happening in the UK now, and other property markets would do well to avoid the same pitfalls. The UK has seven major residential price indices, most taken at different parts of the purchase cycle. One is based on sellers' asking prices, others on mortgage offers, others again on sales data from estate agents and some based on legally completed transactions. On top of these, a few more flakey indices measure buyer confidence or the views of estate agents, sometimes using rather dubious methodology.

If you want statistics on the housing market, the UK is the place to come. Each index is published at a different time of the month and receives extensive publicity in this property-obsessed nation.

The UK's most publicised indices – by the Nationwide building society and the Halifax Bank of Scotland – appear monthly, have thorough regional breakdowns and are impeccably prepared by economists using a transparent methodology. They are published in the week before the monthly meeting of the Bank of England's interest rate-setting Monetary Policy Committee, so have more influence than other indices.

Both have shown prices are now falling, in some cases quite sharply. But despite the apparent rigour of these two indices, are they actually telling the truth?

The reason for doubt is simple; both indices are produced by mortgage lenders and are based on the amounts lent to borrowers for purchasing apartments and houses. However, the sums lent by the Halifax and Nationwide are based on valuations of properties made on their behalf.

And this is where the bias appears to creep in.

These two companies are instructing their valuers to slash valuations on properties, to ensure only the minimum risk is incurred by the lenders themselves. And it is on these newly-straitened valuations that the two lenders' indices are based.

This may explain why the Halifax and Nationwide indices show prices down as much as five per cent to 10 per cent in some UK regions while a rival index – one for the Financial Times, based on completed sales and prepared by business consultancy Academetrics – shows prices slipping only 0.2 per cent in March and April and has year-on-year valuations still in the black. Likewise UK Government figures, also based on completed sales, reiterate the FT trend and show much smaller recent monthly falls of only 0.1 per cent.

A key difference to remember is the FT and UK Government indices include cash purchases, which are particularly important at a time of restricted credit and may now account for a larger share of purchases than in the past. Now I doubt anyone in their right mind believes prices are not dipping in the UK but the source of the housing market problems today is the mortgage market, where lending has plummeted and lending criteria have become much stricter.

Therefore a house price index based on mortgage lending is likely to be harsh.

In my mind, the type of index which looks at all transactions is by definition likely to be the most reliable, especially in these troubled times – and especially when most of the trouble seems to be caused by banks and building societies choosing not to lend.

To international onlookers this may appear a detailed and specific argument. But "new" property markets should know that the more price indices are produced, the more notice is taken of them even if they may have inherently-skewed results.

In the UK right now, confidence in property is low partly because of bad news from the Halifax and indices. Wouldn't it be ironic if that bad news was exaggerated by the way the indices were compiled?

Graham Norwood is a property correspondent for The Observer.