Imagine the situation; the cockpit of a 747 loaded with passengers in cloud and suffering turbulence. Being a belt-and-braces sort of aeroplane it has three altimeters (which tell the pilot how high he is) and three variometers (which tell him how fast he is going up or down). Unfortunately, the pilot is in something of a quandary because each of his altimeters and variometers is telling him a different thing. He knows he is high ? but how high?; some of his instruments are telling him he is climbing steeply and others are telling him that he is losing height. At that moment a passenger appears in the cockpit to tell him that he has just seen skiers outside. This is a worried and confused pilot.

The wise men and women of the committee that now sets interest rates must feel a bit like the hapless pilot as they look at the dials in front of them in the form of data on the housing market. They have a plethora of indices to examine but they all seem to be telling them different things ? the Nationwide is up another 1.9% in March indicating an annual change of 26.2%; Savills are suggesting a dip of 6% in London over the last six months but with falls of double that at the top end. At the same time a stroll down the high street or a visit to a City wine bar in search of enlightenment would discover the equivalent of the worried passenger asking Market? What market?, with so few buyers in sight. As so much in the British economy depends on the housing market, why are its indicators so widely at variance? Everyone quotes them from the bank manager contemplating an asset-backed loan, through to the dinner-party guest in search of safe conversation and yet they seem to add to the fog rather than clear it.

The first, and most obvious, explanation is that there is no such thing as The Housing Market ? there are hundreds of micro-markets with vastly differing prices and dynamics. It is possible to buy a terrace of houses in Burnley, Lancashire, for the price of a one-bedroom flat in Chelsea. The tenant of a housing association in Glasgow has little in common with the aspiring master-of-the-universe in a Docklands penthouse and, at a more local and less extreme level, the market in a riverside new-build in London is rather different from a house on a communal garden in Holland Park. Most of the indices are either trying to track these individual micro-markets or are attempting to iron out the discrepancies by excluding the extremes in order to come up with the mythical average house.

The best examples of the latter method are the well-known and widely quoted Halifax and Nationwide indices who plunder similar databases and follow a broadly similar methodology. As mortgage lenders (Nationwide have about 9% of the market), they have a wide sample to mine and both exclude re-mortgaging from their calculations. They both follow the Hedonic approach to price measurement which attempts to produce an average house and adjust for known seasonal factors (the fact that no-one buys a house over Christmas should not be allowed to skew the trend). They Mix Adjust? which means that they assume that the same number of houses as flats are used in each month, even though one might predominate and, most relevantly to our market, they exclude property over £1m (and property below 400sq ft). If you are confused, then no doubt the following mathematical explanation will clarify things. Pi = b0 + b1X1i + b2X2i + ... +bjXji + ei where b1 ,b2 , ... ,bj are the regression coefficients associated with the qualitative and quantitative variables Xij

Clear now? The net result, apparently, is an average house which tells you something; but also brings to mind the observation that Statistics are like bikinis; what they reveal is interesting, what they hide is vital.

The trouble is that, because there is such huge variance in assembling thisaverage; not to mention so many exclusions; it is perhaps trying to impose statistical order on something that is inherently too variable to make this of practical use to the metaphorical pilot ? and certainly not to the bank manager or the dinner-party guest who is by definition looking at a specific micro-market.

At the micro-market level, the problems are different. For our market, Savills have produced excellent research for a number of years with the value being in the way that they acknowledge that different markets exist and eschew the temptation to homogenise. The flaw is in the source of that information, which is not hard data like mortgage lending, but valuation ? the opinion of their staff ? which is always subjective. The problem they have is in the highly individual nature of the product they are dealing with and, at the upper end of the market, the very small statistical samples due to the relatively low turnover: how do you realistically compare an estate with twenty cottages in Oxfordshire with a house in Eaton Square, selling at similar prices, when only one of each have been sold in the last six months and how do you stop these skewing your averages? They have tackled this by putting together a sample basket of known properties for each office which is valued on a regular basis by the local staff. Unfortunately, these are people who read the newspapers and unconsciously project their own euphoria or depression onto their opinion ? which can be based on next to no turnover evidence; as in the current market conditions.

This subjective tendency can be seen in some of the statistics produced by the agents collective websites ? such as Hometrack. This comes with an additional spin in that much of their data is based on asking prices, not sale prices. It may tell you something about the planet that some sellers are living on, which is interesting in itself, but is not much about a market which normally assumes a buyer is participating. For instance, the period from January to March for houses in SW7 is showing a 3% fall in asking prices, which they say started in September (at a lesser rate). Maybe we really are good negotiators because the prices our clients are paying would indicate a fall of around 15%.

All this is very arcane but one has to keep reminding oneself that this does matter. Interest rates are the one control available our fictitious pilot and every instinct would be to chop the throttle and lose some height if he is looking at the Nationwide or Halifax dial on the instrument panel. When the Halifax et al were indicating price rises of 25% plus per annum in 2002, there were many (with a vested interest to be sure) such as house-builders who were loudly questioning the data as their own sales figures were showing increases of half this. On the face of it, this is curious as one would have thought, even allowing for the oddities produced by the average house, that the building industry would be a good proxy for an index. An explanation for this, and one which might suggest that the builders have a point, is the multi-billion decorating and DIY industry. It may be a blinding glimpse of the obvious but the reason why everyone spends so much on their homes is that by doing so, value is added. It might be that some of the increase in the indices is actual, real, addition of value and not just stippling and speculative froth. House builders are, of course, consistent sellers of a product which already has the value added ? in other words they are comparing like with like.

The twin of prices and their direction, is affordability which again is an area that is not as clear-cut as either the bulls or bears would have it.

Affordability is the relationship of average salaries to average house prices (one should, by now, be worried by that a word). The three bears growl that history tells us that trouble looms when the multiple starts going over 5; and we are over that now. Goldilocks believes that affordability is also about interest rates and that we are in a long-term era of low inflation with mortgage rates at 5% rather than the 15% that they reached in the grim days of the early nineties.

One factor which seems to us to be crucial, but which never seems to get an airing in this debate, is the interest-only mortgage. It seems hard to believe now but, until about six years ago, UK residential property investors (buying for investment rather than end use) had real problems finding a bank to lend them money. We had meetings with two or three lenders at that time to look at the possibility of (very conservative) interest-only loans for investors who had a medium time-frame for their investment and where the loan would be paid off out of the sale proceeds. We were packed off with a condescending lecture on prudent lending. Times have changed; a well-known mortgage broker told us recently that he couldn't remember the last time he had arranged a repayment scheme on a loan.

As affordability is essentially about cash-flow ? i.e. how much is flowing out of your bank account on a monthly basis ? the implications of this sort of lending on affordability is huge. Of course, as the three bears would rejoin, this is simply deferring the problem to fifteen or twenty years time when the gloomiest of them will remind you that repayment day is going to coincide with a pension shortfall ? it doesn't bear thinking about, so most people don't.

If, under this scenario, for the long-term we are going to have to rely on the Micawber principle of something turning up, the corresponding outlook for the short to medium term would suggest that affordability ? judged by cash-flow ?is remarkably good. There may be all sorts of other economic problems around at the moment (sentiment is not being improved by the threats from theTreasury on non-domicile status and job-cuts in the City) but the sort of interest-rate pressures that caused the collapse in the late eighties would seem to be absent. The three bears would say we are living in a fool's paradise and maybe they are right; but as WC Fields, who coincidently played the part of Micawber, once said, A fool and his money are damned lucky to get together in the first place'.

So where does this leave us, the poor passengers at the back of the plane? As we are interested in micro-markets, the indices are helpful as long as we know where their information is coming from and how it is being interpreted. It is the poor pilot who has the problem, the same problem that daily confronts Wim Duisenberg, the head of the European Central Bank, as to what he should do with his one crude, interest-rate control, with so many competing warning lights blinking at him. If the affordability situation really is benign then hopefully, even in thick fog, we may have that rarest of events – a soft landing.

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