ONS Economic Forum - Special Topic: Measuring owner occupiers' housing costs in CPIH Chair: Jonathan Athow Deputy National Statistician for Economic Statistics, ONS 1

Today’s seminar Rent and owner occupied housing costs important issue for price indices Challenging issue both methodologically and practically: some countries/indexes do not include it ONS made significant progress in recent months Published various articles and data Today, we bring it altogether Also lots of other data and analysis in the public domain (e.g. house prices, rents) Often compiled for different purpose so not directly comparable So will also explain how the data reconcile 2

Today’s seminar Will not be saying more about UKSA response to consultation on future of price indices …Nor anything on designation of CPIH as a National Statistics …And we are not planning detailed discussion of pros and cons of various measures of housing costs Focus on how we are implementing rental equivalence and the figures produced 3

Rental equivalence House prices = asset value + cost of ‘housing services’ Inflation indices try to measure cost of goods and services, not assets Rental equivalence is way of getting at cost of housing services An opportunity cost type of argument: By living in my house, I am forgoing rent which is therefore a proxy for housing cost, or If I did not own a dwelling, to secure ‘housing services’ I would need to rent one Only apply it to housing, not other consumer durables 4

An idea with a long history “We have noticed also that though the benefits which a man derives from living in his own house are commonly reckoned as part of his real income, and estimated at the net rental value of his house; the same plan is not followed with regard to the benefits which he derives from the use of his furniture and clothes. It is best here to follow the common practice, and not count as part of the national income or dividend anything that is not commonly counted as part of the income of the individual.” Alfred Marshall, Principles of Economics, As quoted in W. Erwin Diewert, The Consumer Price Index and index number purpose, Journal of Economic and Social Measurement 27 (2001) 167–248 5

Today’s Agenda ONS - Development of the owner occupiers' component of CPIH and research on the private rental sector Countrywide - Expert in the private rental sector: Johnny Morris (Research Director) Refreshment break 10:50 Open panel discussion (ONS, Countrywide and the Bank of England) 11:30 Close 6

Development of the owner occupiers' component of CPIH and other measures of rents Ainslie Woods Head of Prices Development, ONS 7

Development of OOH (CPIH) Jun 2009 Introduced OOH concepts at first CPAC meeting Sep 2010 Ruled out two methods – payments and narrow user cost Nov 2010 – Apr 2012 Rental equivalence and net acquisitions methods developed further 8

Development of OOH (CPIH) Apr 2012 Recommendation made to use rental equivalence approach Jun – Aug 2012 Consultation on recommendation Sep 2012 UK Statistics Authority Board approve National Statistician’s recommendation Mar 2013 Publication of CPIH 9

Historical rents data Data were deemed unsuitable for measuring OOH using the rental equivalence approach in CPIH mainly due to: o low sample size o lack of stratification variables Price collection  Part of the local collection covering 141 locations  6 furnished and 6 unfurnished price collected per location once a quarter (on a rolling monthly basis) Number of prices  Sample of approx 1300 Replacements  Collectors will attempt to find a replacement property of the same size/type if required Variables available for stratification  Regions  Furnished/unfurnished split 10

A new source of rents data Price collection  Prices collected by rental officers for the Valuation Office Agency (VOA)  Comparable data from the Welsh and Scottish Governments Number of prices collected ~500,000 pa – England ~25,000 pa – Wales ~25,000 pa – Scotland Replacements  No formal procedure in place for following up properties Variables available for stratification  Regions  Furnished/unfurnished split  Dwelling type Data better met needs for measuring OOH using the rental equivalence approach, however: o Due to legislation ONS has no access to VOA micro data on private rental market o No formal procedure in place for following up properties so a replacement methodology was developed 11

Sample sizes ~300,000 properties selected for the sample 12 Region Sample count North East12,800 North West33,300 Yorkshire and The Humber 28,600 East Midlands28,500 West Midlands22,000 East25,300 London34,800 South East44,100 South West46,100 Wales13,210 Scotland13,200 Property Type Sample count Flat131,500 Terraced86,500 Semi-detached49,200 Detached34,500

The rental equivalence series Private rental indices developed using new data source Strata level indices re-weighted to represent the OOH sector Unfurnished rental data only Historical CPI rents data used where new data sources are unavailable Data enabled the publication of the Index of Private Housing Rental Prices - IPHRP!! (Jun 2013) YearEnglandScotlandWalesNorthern Ireland 2005 VOA CPI (historical rents data) CPI (historical rents data) CPI (historical rents data) Welsh Government Scottish Government

IPHRP A measure of the change in price of renting residential property from private landlords A ‘stock’ measure of rents (not a ‘flow’ measure) Not a measure of rental levels Specifically measures inflation – so ‘like for like’ to remove quality effect 14

Improvements and revision IPHRP (and OOH) indices deemed to underestimate inflation compared to user expectation / other methods ONS reviewed series alongside VOA and identified shortcomings with the processing and implementation of the methodology CPIH de-designated as a National Statistic (Aug 2014) Improvements implemented (Mar 2015) Re-assessment of CPIH as a National Statistic commenced Sep

Impact of improvements to IPHRP - GB 16

Impact of improvements to IPHRP - London 17

Impact of improvement to OOH 18

Other measures of rents… 19

Comparison of IPHRP and other measures 20

Ways to look at rents Temperature of tap water will change temperate of bath overtime Bath water is the current occupied rent Running tap water is the new lets 21

Countrywide – new lets v occupied lets 22

IPHRP v Countrywide 23

Research using VOA data Rhys Lewis Head of Housing Market Indicators, ONS 24

ONS and VOA rental growth VOA PRM and ONS rental indices based on same underlying data Both showing different rental growth over time Article attempts to explain differences What are these differences?

What are these differences? Coverage - rooms in HMO - services Methodology -simple average vs matched sample -weighting and Stratification 26

IPHRP sample average 27

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Impact of compositional change YEARINNER LONDONOUTER LONDON £750 £833 Average Price 30

Compositional change on IPHRP 31

Compositional change on IPHRP Price % 11 % 7 %

Summary OOH conceptually difficult to measure CPIH uses rental equivalence approach Rental indices show lower growth rate than average rents Due to composition shifts in the rental market (mainly driven by London) 33