Rental prices are a key element of the housing market, and we have seen these picking up since the impact of the pandemic. Our previous blog explained the importance of the private rental sector (PRS) and how we are working to make better use of detailed rental data to develop a clearer picture of what is happening within the rental market. Here, Chris Jenkins explains some of the differences between how rental data are measured.
Our current measure of price change in the PRS, the Index of Private Housing Rental Prices (IPHRP) is is often compared to other measures of private rents that are published by private sector organisations, such as HomeLet, Rightmove and Zoopla. While we publish regular analysis of these differences, it is worth revisiting these again here.
The IPHRP was designed as a ‘stock-based’ measure of rental prices – that is, the methodology used reflects the fact that the PRS comprises of ‘existing’ tenants in long-term contracts, which could mean their rental price is fixed for 6-12 months or longer, ‘renewal’ tenants, where an existing tenant renews their rental agreement with their landlord and ‘new’ tenants, where advertised rental prices are dictated by the current market conditions.
Given this stock-based approach, our IPHRP methodology assumes when a rental price is collected, it doesn’t change for 14 months unless an updated price is received. This period is chosen to reflect the average length of a contract which can typically be 6 months, 12 months, or 24 months and is intended to reflect the actual experience of contracted tenants for whom their rental price won’t change month-to-month. If there is no updated price within this 14-month period, then the property is replaced with a new rental property. Full details of the methodology used for IPHRP can be found in the IPHRP methods paper.
The private sector measures of private rents are mainly based on those rental properties that are newly advertised, or ‘flow-based’ measures. The fact that advertised rents are used will mean these flow measures reflect the dynamic end of the rental market where price changes can be more volatile than a stock measure as they quickly adapt to changes in the price which landlords are advertising.
A useful analogy, as provided by a colleague from the letting’s specialist Countrywide several years back, is to think of the PRS as a bathtub of water. The temperature of the water in the tub represents the stock of rents (all rents), while the water entering the tub from the taps represents the flow of rents (advertised rents). The flow of water entering the tub is hot when rents are increasing (or cold when falling), as this is reflecting the newly advertised, market driven rental prices. However, it will take time for this flow of water to change the overall temperature of the water in the tub.
As a result of the different methods used, it is correct that the IPHRP usually shows lower growth in rental prices than the private sector measures. This is not an attempt to ‘smooth’ prices , but to reflect the fact that IPHRP is intended to cover all rents – the majority of which will not see price change month-on-month.
We also use the same methods and data sources to measure owner-occupied housing costs (OOH) in our headline measure of inflation, the Consumer Prices Index including owner-occupied housing costs (CPIH). We use the rental equivalence approach as a proxy to measure housing costs, as explained in a previous blog, which effectively values the ‘housing services’ you get from your house by looking at what it would cost to rent an equivalent property.
This is based on the idea that if you did not own a house, you would need to rent one. There is no international consensus around whether it would be preferable to use a flow or a stock measure for OOH, however, our use of the stock-based measure is currently consistent with other countries who use the rental equivalence approach and general international best practice. Our current data sources don’t allow us to separately identify the flow element of the rental market, so we will be investigating new sources of data that may allow us to capture this element separately in the future.
We also recently published details of the new methodology we intend to use to improve our rental price statistics, along with an updated timetable for this exciting development. We would welcome your views on our plans. Please get in touch via HPI@ons.gov.uk.