Private rental growth measures, a UK comparison: April to June 2018

The Index of Private Housing Rental Prices (IPHRP) measures the change in price of renting residential property from private landlords. The same private rent price indices are also used for the rental equivalence measure of owner occupiers’ housing costs (OOH) in the Consumer Prices Index including owner occupiers’ housing costs (CPIH).

With CPIH becoming the lead measure within the consumer prices statistical bulletin and CPIH being re-designated as a National Statistic, the quality of private rental data is paramount. This is because OOH are based on a rental equivalence (RE) approach; specifying that the cost of housing services is estimated by looking at the cost of renting an equivalent property to the one you own.

This RE method is conceptually strong and the approach used in Germany and the United States of America, but requires a large amount of good quality data to be implemented. OOH in the UK is based on rental data drawn primarily from the Valuation Office Agency (VOA) and consists of around 500,000 separate rental estimates per year, giving approximately 40,000 prices per month.

VOA is one of a range of sources of rental data across the UK, but is the one that provides the highest quality and most robust data for measuring consumer inflation. The remainder of this article assesses the merits of the different data sources, highlighting why the VOA data best meet the requirements for a monthly Consumer Prices Index.

Superficially there is a considerable difference between Office for National Statistics’ (ONS’s) measures of rents, the Index of Private Housing Rental Prices (IPHRP) and owner occupiers’ housing costs (OOH), and comparable indicators from the private sector. However, once adjustments are made for differences in what the indices are measuring, the ONS measure of rents is more closely aligned with the other sources of rental prices.

Some of the differences can be explained by compositional changes and quality changes in the stock of rental properties. Both are specifically excluded from IPHRP to ensure that only pure price change is captured in the index. Put another way, the aim of the IPHRP is to compare “like with like”.

In addition, there are methodological differences in the way rental prices can be measured. One approach is to measure the stock of rents; that is, aiming to capture the price of all properties in the rental market. The second approach is to measure the flow of rents, in other words, to capture the price of new lettings made in the reference period. Both approaches yield different results.

A number of private sector organisations – estate agents and property companies – produce estimates of changes in rental prices. These include Countrywide PLC, HomeLet and LSL Property Services. In addition, other companies such as Zoopla are a rich source of rental data. All of these sources provide an extensive range of rental data, but a closer look at the various rental measures published by them over recent years provides a diverse picture, as shown in Figure 1.

Historically the rent increases measured by the private sector have tended to be higher than those shown in the Index of Private Housing Rental Prices (IPHRP). Also, the private sector measures are more volatile. This higher level and volatility of the private sources can be mainly explained by what the different data are showing. Firstly, almost all the private sector measures primarily focus on newly let properties, whereas IPHRP picks up a mixture of newly let properties and existing lets.

This is important, as evidence obtained from Valuation Office Agency (VOA) rental officers suggests that the greatest price rises occur when properties are newly let, compared with existing tenants, who tend to see smaller price increases. In early 2016, the VOA placed a question in the BDRC Landlord Panel survey whose respondents comprise National Landlord Association members with a wide range of portfolio sizes and geographies. The question asked, “What was the typical level of rent you were able to achieve?” broken down by “new tenants” and “renewals with existing tenants”, in 2015. It was reported that 23% of new lets were charged at the same rate as the previous letting, however, 46% of renewals saw no increase. For those whose rent did increase, the average increase for new lets was 5.0% while for renewals this was lower at 3.4%.

To summarise, landlords were less likely to increase rents for existing tenants, and when rents were increased, it was by a smaller percentage. This is thought to happen because landlords make a considered business decision, preferring a small increase from a known reliable tenant, rather than experiencing a void period with no income and the associated cost of re-letting. Consequently, larger price increases tend to occur when the existing tenant moves out and the property is advertised.

In addition, analysis of contract length statistics finds that rental contracts tend to last for around 12 months. During this contract period a tenant’s rent is unchanged. IPHRP, as a measure of the stock of rental properties, includes all new lets, those renewing their contract and those within their existing contract. This results in a smoother series than those that simply focus on new lets, where there is more volatility between each month.

The various measures and their methods are summarised in this section.

Index of Private Housing Rental Prices

Index of Private Housing Rental Prices (IPHRP) measures the change in price that tenants face when renting residential property from private landlords, thereby allowing a comparison between the prices tenants are charged in the current month as opposed to the same month in the previous year. The index does not measure the change in newly advertised rental prices only, but reflects price changes for all private rental properties.

The IPHRP is constructed using administrative data. That is, the index makes use of data that are already collected for other purposes to estimate rental prices. The sources of rental prices are the Valuation Office Agency (VOA), Scottish Government and Welsh Government. All three organisations deploy rental officers to collect the price paid for privately-rented properties. The sources of expenditure weights are the Ministry of Housing, Communities and Local Government (MHCLG), Scottish Government, Welsh Government and the VOA.

Countrywide PLC

Countrywide has over 1,300 offices nationwide operating under locally-recognised brands. Countrywide regularly publishes a monthly new lets average rental price, which is based on 4,000 to 5,000 properties let in the reference month by letting agencies under the Countrywide umbrella. The data are weighted and stratified by regions and number of bedrooms. The regional weights are derived from the English Housing Survey (EHS) and the “number of bedroom” weights are calculated using Countrywide data. Countrywide also manages a portfolio of 75,000 properties and historically published an occupied lets and a renewal average rental price based on this portfolio of properties.

In earlier publications of this release we presented the Countrywide occupied lets index against IPHRP and found that both datasets followed vary similar paths. This is not surprising as occupied lets account for around 90% of the stock. While there were some differences, these were explained by differences in coverage and methodology. Given both series showed very similar trends, this provides additional confidence in IPHRP as a robust measure of the growth in the stock of rental prices.

HomeLet

HomeLet is a private company that provides tenant referencing and insurance for letting agents, landlords and tenants. Since January 2009, it has published a UK new lets monthly index called the HomeLet Rental Index, which is based on achieved private rental prices collected from its tenant referencing services (around 29,000 per month). In August 2016, HomeLet re-launched this index incorporating a methodology that stratifies by property type and geography and a historic series was also made available.

LSL Property Services

LSL Property Services is a provider of residential property services, including residential lettings. Its estate agency arm trades under a number of brands. LSL has commissioned a monthly private housing rental index since January 2011 called the Buy-to-Let Index, which is based on around 7,000 new lets in a month, collected from the mix of rental services that it provides across England and Wales. The sample is stratified and weighted by “government regions” and by property type. The weights for regions are derived from the EHS, whereas property type weights are derived from LSL’s database of privately-rented properties spanning a number of years.

Zoopla

Zoopla is a property website covering the residential property market, which focuses on providing users with the resources they need to make better-informed property decisions. Launched in 2008, the Zoopla website is a searchable directory of UK residential properties and is one of the leading online destinations for property consumers to search for homes and do their market research.

We previously obtained rental data from Zoopla Property Group PLC through the Urban Big Data Centre, which we used to construct a London flats rental index. In an earlier publication of this release we showed trends in the two series are very similar but the constructed Zoopla series leads IPHRP by around four months. We concluded that this may be due to the Zoopla data being based on advertised lets, which are likely to be ahead of when the property is initially let.

Tenancy deposit schemes

Landlords must put tenant deposits in a government-backed tenancy deposit scheme if the home is rented on an assured shorthold tenancy that started after April 2007. In England and Wales deposits can be registered with; Deposit Protection Service, MyDeposits and Tenancy Deposit Scheme.

In November 2017 the Deposit Protection Service launched their own rent index, which they plan to publish quarterly. The series is constructed using the rental transactions it has collected over the last 10 years. A regression is used to control for changes in the mix of properties over time using; property type, number of bedrooms, furnished status, ACORN and Parliamentary constituency as characteristics.

In evaluating measures of rental price, some users have focused on the difference between the average rental prices published by the Valuation Office Agency (VOA), as part of their Private rental market statistics (PRMS) publication, and the Index of Private Housing Rental Prices (IPHRP). Both are based on the same underlying private rents data collected by VOA rent officers for England.

Figure 2 presents the 12-month growth rates for the VOA PRMS series and IPHRP (using the England IPHRP series for comparability). Two additional series are also presented, which adjust for changes in the composition of the VOA PRMS sample over time.

There are clearly some major differences between the VOA PRMS series and IPHRP. This raises the question; “How can we have confidence in IPHRP if it diverges so much from VOA private rents series?" Well, these differences can be explained.

IPHRP is a “price index”, in that it seeks to make pure price comparisons, whereas VOA’s PRMS is a simple “average of transactions” collected during the period – the latter is designed to provide a “snapshot” of the rental market over the previous 12 months.

Over the period January 2013 to June 2018, the average annual growth rate of the VOA PRMS is 3.1% compared with an average annual growth rate in IPHRP of 2.0%. The difference of 1.1 percentage points can be accounted for as follows:

• geographical compositional effects (0.5 percentage points) – as shown by the lightest (yellow) line in Figure 2

• compositional changes relating to the number of bedrooms of properties in the VOA PRMS sample (0.2 percentage points) – as shown by the darker (blue) line in Figure 2

• coverage differences between PRMS and IPHRP (0.2 percentage points) – as shown in the article Explaining private rental growth

The remainder (around 0.2 percentage points) of the difference can be explained by:

• the application of price index methodology to calculate price indices (a matched sample and mix adjustment); this is discussed further in the article Explaining private rental growth

• changes in composition below the local authority level

• a general improvement in the quality of the private rental sector – changes in quality would impact an average price measure but are intentionally removed from a price index; in recent times, the size of the privately-rented housing stock has more than doubled and some of this supply has come from the owner-occupied market, which is generally in better repair than the rental market, evidence from the English Housing Survey suggests that rented properties are now better maintained than they were a few years ago

We are therefore confident that we understand and can explain the differences between the tracks of the IPHRP and VOA PRMS, and are confident that IPHRP is a fair reflection of the increase in rental prices over time. Additional work will be taken forward to further break down and explain the remaining difference.

A simple example illustrating how compositional change impacts an average price measure is available in Annex A.

The analyses in this article and earlier publications of this release, which presented additional analysis using Countrywide and Zoopla data have shown the wide range of sources available for rental data and highlighted the extent of similarities, and differences, that exist between them. Releases of this publication have all pointed to the Index of Private Housing Rental Prices (IPHRP) being a high-quality and robust measure that is fit for purpose in measuring UK consumer price statistics.

However, there is still an ongoing requirement to ensure that IPHRP keeps abreast of any developments in the private rental market and that the statistics keep pace with the rapidly developing big data agenda. Section 7 of Private rental growth measures, a UK comparison: January to March 2017 provides further details on some of the aspects of the work programme that provide the ongoing assurance and development of rental price statistics.

Section 4 made reference to change in the composition of the Valuation Office Agency (VOA) sample, but why does this matter? Well, this has a large impact on the “average rents” measure, in increasing it. However, there is not a similar impact on the index, as this does not happen with a price index measure – these effects are intentionally excluded as the index aims to compare “like with like”. A simple illustration of this is presented in Table 1.

Table 1 shows two local authorities (LAs) – LA1 has a monthly rent of £500 whereas LA2 has double this, at a monthly rent of £1,000.

The monthly rent is the same in both years 1 and 2 for each of the two LAs. However, the relative weights between the two years have changed, with both LAs accounting for 50% of the total market in year 1, but the split between LA1 and LA2 changes to 40% to 60% respectively in year 2.

The weighted average rent has therefore increased from £750 in year 1 to £800 in year 2 (a 6.7% increase), all due to a change in composition in the population. However, there has been no actual increase in the rental prices, so a rental price index would show no increase in prices between periods 1 and 2, whereas the average rents approach would show an increase.

The article Explaining private rental growth includes historic analysis on changes in the composition of the VOA PRMS sample and its impact on the resulting series.