Measures of owner occupiers' housing costs, UK: October to December 2019

• Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.2% over the 12 months to December 2019.

• OOH according to the net acquisitions approach have grown by 1.6% over the 12 months to December 2019.

• OOH compiled using the payments approach have grown by 2.0% over the 12 months to December 2019.

The Office for National Statistics (ONS) has released a public statement on the coronavirus (COVID-19) and the production of statistics. We are working to ensure that we continue to publish our consumer price statistics. Further information is available from the Consumer price inflation, UK: February 2020 bulletin.

Owner occupiers’ housing costs (OOH) are the costs of housing services associated with owning, maintaining and living in one’s own home. This is distinct from the cost of purchasing a house, which is purchased partly for the accumulation of wealth and partly for housing services.

OOH is an important component of the household consumption basket. In the Consumer Prices Index including owner occupiers’ housing costs (CPIH), the OOH component is measured using the rental equivalence approach, OOH(RE). However, there are other approaches to measuring OOH.

In this article, we focus on two alternative approaches: payments, OOH(payments) and net acquisitions, OOH(NA). The OOH(payments) approach is also used in a new set of indices called the Household Costs Indices, which aim to reflect changing prices and costs as experienced by households. This article compares these approaches with the rental equivalence approach and discusses the performance of the different measures over time, in prevailing economic conditions.

Recent improvements were introduced to the way that we calculate the Stamp Duty Index, a component of both OOH(NA) and OOH(payments). Details of these improvements can be found in the previous release, Measures of owner occupiers' housing costs, UK: July to September 2019.

The first article in the series provides more information about the different approaches to measuring OOH to aid your understanding of the differences in concept, underlying methodology and data sources, and associated advantages and limitations to each approach. There have also been several “Spotlight” sections produced, which focus on different topics relating to OOH. These topics are listed in the “Related links” section.

You should note that the payments and net acquisitions approaches are both experimental indices and therefore we would caution against any use other than for research purposes. More information on the methodology for each approach can also be found in the CPIH compendium.

We are currently undergoing a review of our Prices publications. This could result in changes to the scheduling of OOH releases in the future.

We invite you to submit feedback related to this release to cpi@ons.gov.uk.

Figure 1 presents the cumulative indices for each approach and Figure 2 shows the annual 12-month growth rates.

The index for the owner occupiers’ housing costs net acquisitions approach – OOH(NA) – has shown the strongest growth over the period (Figure 1). The payments approach – OOH(payments) – saw strong growth prior to the economic downturn in 2008 to 2009. However, of the three measures, it has also seen the largest fall since the economic downturn and has still not recovered its pre-downturn peak.

In the latest three months (October 2019 to December 2019), both OOH(NA) and OOH(payments) experienced a minor dip in the index before recovering in December to be within 0.1 index points of the index at September 2019. OOH(RE) experienced gradual growth over the same period.

Over the period, the rental equivalence approach – OOH(RE) – experienced the fewest fluctuations in the 12-month growth rate (Figure 2). For two months in a row, October and November 2019, all three indices have shown very similar 12-month growth rates, with a maximum of 0.2 percentage points difference between them. However, they begin to deviate again in the 12 months to December 2019, where the growth rate of OOH(RE) was 1.2%, compared with 2.0% for OOH(payments) and 1.6% for OOH(NA).

Figure 3 shows the contributions to the 12-month growth rate for OOH net acquisitions – OOH(NA) – from January 2019 to December 2019.

An increase in the contributions to growth from the “other services related to the acquisition of dwellings”, from 0.1 percentage points to 0.6 percentage points between November and December 2019, was the main factor in the rise seen in overall 12-month growth rate for OOH(NA) over the same period. “Other services related to the acquisition of dwellings” includes transfer costs and Stamp Duty.

Figure 4 shows the corresponding contributions chart for OOH(payments).

In the latest quarter (October to December 2019), a decline in the contributions to growth from mortgage interest payments resulted in a fall in the 12-month growth rate, before picking back up in December 2019 again because of an increase in Stamp Duty.

The Bank of England base rate has remained stable over the period from August 2018 to December 2019, at 0.75%. This could explain why the contributions to the 12-month growth from mortgage interest payments decreased from 1.7 percentage points to 0.2 percentage points between September and October 2019. Stamp Duty increased from 0.1 percentage points to 0.7 percentage points between November and December 2019.

The owner occupiers’ housing costs rental equivalence approach – OOH(RE) – uses the rent paid for an equivalent house as an estimate of the cost of housing services that are consumed. That is, we value housing services by looking at the cost of the next best alternative to home ownership, namely renting a property. Importantly, OOH(RE) does not capture changes in asset value. Rather, it measures the change in price of housing services provided.

The payments approach – OOH(payments) – aims to measure the payments related to the ownership of owner-occupied housing. This means that all payments households make as owner occupiers when consuming housing should be included, such as mortgage interest payments, transaction costs and running costs.

OOH(payments) is not our favoured method for measuring owner occupiers’ housing costs in the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This is because a consumer price index aims to measure consumption, and interest payments represent the cost of borrowing money rather than the cost of consumption. However, OOH(payments) is our preferred measure for the Household Costs Indices (HCIs), which depart from consumption principles, and aim to capture households’ experience of changing prices and costs. For more information about the HCIs, please see the article Developing the Household Costs Indices (HCIs).

The net acquisitions approach – OOH(NA) – aims to measure the costs of acquiring a house with household-to-household transactions netted off. The approach theoretically treats a home as the purchase of a good that is part asset (the land) and part consumable (the house) and excludes the land component from the index. OOH(NA) also includes costs associated with buying and maintaining a house, for example, self-builds and renovations, repairs and maintenance, transfer costs and dwelling insurance.

In practice, while the measure presented here is the best measure of OOH(NA) that we can currently produce, the lack of available source data means that some components are not recorded fully. We therefore advise that OOH(NA) should be used and referred to with caution, and it is consequently not our favoured approach of measuring OOH in CPIH.

Table 1 shows the components of these different approaches. For more information about each, please see the CPIH compendium or the first article in this series.

The topics and links of the focused analyses (“Spotlight” sections) from previous publications:

Spotlight: the relationship between private rents and house prices

Spotlight: owner occupiers’ housing costs in the RPI

Spotlight: analysis of revisions to OOH(RE) expenditure weights

Spotlight: changes to methodology

Spotlight: exploratory analysis of the impact of errors in the OOH stratum weights

Spotlight: changes to methodology of the OOH(payments) approach

Spotlight: changes to OOH revisions policy

Improvements to Stamp Duty Index methodology

The most recent Household Costs Indices results:

Household Costs Indices, UK: second preliminary estimates, 2005 to 2018