Market
How a local housing market actually works
A housing market is not a price. It is a quantity of dwellings, a much smaller quantity of moves, and a bargaining process that happens one street at a time.
Stock changes slowly; prices do not
The first thing to hold on to is that the housing stock of any settled place is close to fixed. New building in a normal year adds a fraction of a per cent to the number of dwellings that already stand there, and demolition removes less than that. Whatever is going to be lived in next year is, overwhelmingly, already built and already occupied. Yet prices in the same place can move by a tenth in either direction inside eighteen months. That gap between a nearly constant quantity and a volatile price is the central fact of housing, and almost every confusing thing about the subject follows from it.
It follows because price is not set by the stock. It is set at the margin, by the handful of dwellings that happen to be for sale at a given moment and the handful of buyers who happen to be looking at them. In a town of twelve thousand homes, a few hundred might be on the market in a year and rather fewer will change hands. Everything published about the town's prices is derived from that thin edge, and the thin edge is not a random sample of the whole. It is skewed by who is moving and why.
Why the flow is so thin
People move for a small number of reasons, and most of them are not price. They move because a household forms or dissolves, because a job moves, because a family outgrows a floorplan or shrinks out of one, because someone can no longer manage stairs, or because someone has died. These are life events, and they arrive at their own pace regardless of what the market is doing. Layered on top is a much more price-sensitive group: people who would like to move up, sideways or out, and who will do it if the arithmetic works and quietly stay put if it does not.
That second group is why transaction volumes swing far more violently than prices do. When borrowing becomes more expensive or confidence drops, the discretionary movers simply withdraw. The life-event movers remain, because they must. So a market under pressure often shows a modest fall in achieved prices and a dramatic fall in the number of sales. Volume is the more honest early indicator, and it is the one least reported.
Chains, and why they matter more than anything
Most sellers are also buyers. A household selling a two-bedroom flat is usually buying a three-bedroom house, and the household selling that house is buying something else again. Each of these purchases is contingent on the sale beneath it, and the whole sequence has to complete on the same day or not at all. This is a chain, and it is the mechanism by which one failure anywhere becomes many failures everywhere.
A chain is only as fast as its slowest participant and only as reliable as its weakest link. The buyer at the very bottom - typically someone buying their first home, with nothing to sell - is structurally valuable out of all proportion to the money they are bringing, because they are the only person in the sequence who cannot be delayed by their own sale. At the top sits someone with nothing to buy, often an estate being wound up or a household leaving the area entirely. Between those two ends, everyone is exposed to everyone.
The practical consequence is that the price agreed on a house is only part of the offer. A buyer's position in a chain, the state of their financing, and how much of the legal work they have already done are all part of what a seller is choosing between, and a lower offer from a shorter chain is frequently the better one. Nothing in the headline price reflects this.
A town is several markets
The phrase "the local market" flatters the data. Within any town of reasonable size there are groups of dwellings that behave almost independently of one another. A row of small terraced houses near a station, a 1930s semi-detached suburb, a postwar estate on the edge, a handful of large houses in the oldest part, and a block of recent flats are five different markets that happen to share a postal address. They have different buyers, different financing, different sensitivity to interest rates and different reasons for turning over.
Small flats are usually bought by first-time buyers and investors, both of whom are acutely sensitive to borrowing costs and both of whom can withdraw completely. Family houses are bought by people who are moving because of children and schools, and who will stretch a long way rather than not move. Large old houses trade rarely, at whatever a very small number of interested parties will pay, and their price series is close to meaningless because it is built from too few sales. When an average is taken across all five, the result describes none of them, and it moves whenever the mix of what sold changes even if no individual dwelling changed in value at all.
What the published numbers are actually measuring
Three different things get called the price of a house, and confusing them causes most arguments about whether a market is rising or falling. The asking price is an opening position chosen by a seller, and in a slow market it can sit above anything achievable for months. The agreed price is what a buyer and seller shook hands on, and it is unreliable because a meaningful share of agreed sales never complete. The achieved price, recorded when the transaction legally completes, is the only one that describes a real event - and it describes a decision made weeks or months earlier, so it arrives already out of date.
Every price series is therefore a lagging, mix-affected, thin-sample measure of something that was true a while ago. This is not a criticism of the people who compile them. It is a structural feature of a market where the traded quantity is tiny relative to the stock and no two units are the same.
Why no two units are the same
Shares in a company are interchangeable; houses are not. Two houses built to the same plan in the same week can differ by a fifth in value because one faces the sun and the other faces a road, one has been maintained and the other has not, one has a usable garden and the other has a slope. This heterogeneity is what makes valuation an act of judgement rather than a lookup, and it is why the market clears slowly. A buyer cannot simply take the cheapest unit, because the units are not substitutes.
It is also why local knowledge is durable and hard to replace with data. The fact that one side of a street floods, that a particular estate has a shared drainage arrangement, that a row of houses was built on a filled quarry - these are the things that separate two apparently identical addresses, and they tend to be known before they are recorded.
How to read a market, in practice
If you want to understand what is happening where you live, look at four things in this order. First, how many properties are on the market compared with a year ago, and how long they have been listed. Second, how many are being reduced, and by how much - reductions are visible long before achieved prices move. Third, what is actually completing, and in which submarket. Fourth, and only fourth, the average price. The last of these is the one everybody quotes and the one that tells you least.