Independent: What's really happening to rents?

HAMISH_MCTAVISH

One of the last great fallacies being peddled by the housing shortage deniers involves an experimental rent index created by the ONS.

Essentially, this index tracks rents by including the rent of all existing tenants as well as new tenancies.... this would be like compiling a house price index by including the sale price of all houses, even those sold 5 or 10 years ago, as well as current sale prices.

Clearly, this would be ridiculous way to measure HPI, and just as clearly, it's a ridiculous way to try and measure rent price inflation in properties available for rent today.

Of course, the ONS did not create the index for that purpose, but rather to track the overall level of rent being paid by the population for broader macroeconomic purposes.

However this has not stopped housing bears using it to make spurious claims that rents are rising at a much slower pace than they really are, and hence to deny the housing shortage, while claiming it's only lending driving up prices.

The independent has run an article examining the two indices.... And concluded that the housing shortage deniers are wrong.

As we've known around here for a long time, rent rises have in fact tracked HPI very closely in recent times, with new rents increasing by 30% in the last few years.

HomeLet’s index covers only new tenancies, whereas the ONS index covers existing ones too.

This implies that people who have remained continuous tenants over the past six years will have done quite well. But people who have started renting, or moved, will have been hit hard.

Which index is superior? That depends on what one is trying to measure. If it’s the broad experience of renters then the ONS’s is better.

But if it’s people coming into the market or moving frequently (as younger people often do) then the HomeLet index captures their experience more fully.

That won't settle the great bubble debate, but viewed through this analytical lens, there is not such a great divergence, over the past year, between the movement of average rents and prices, suggesting that a shortage of housing supply, not speculation, is driving the property market:

http://blogs.independent.co.uk/2014/07/29/whats-really-happening-to-rents/

the_flying_pig

HAMISH_MCTAVISH wrote: »

...The independent has run an article examining the two indices.... And concluded that...

Stuff and nonsense. I don't see this blogger conclude anything.

Graham_Devon

Hamish, you have written so many threads concerning these "housing shortage deniers".

Who are they?

It seems everyone on this board would welcome more housing.

lukeh23

Graham_Devon wrote: »

Hamish, you have written so many threads concerning these "housing shortage deniers".

Who are they?

It seems everyone on this board would welcome more housing.

I was going to say the same. Its the only point we all agree on.

Generali

There is clearly something strange going on: an index of existing rents shouldn't continue to diverge with new rents as it becomes ever more profitable and thus tempting to kick out an existing tenant to put in a new one.

I'm tempted to say that one or other has been badly done in some way.

Jason74

A fair point Generali. The only (small) thing I can add to this is the situation with my own modest pad in South London. I paid £92k for it in 2002 (seemed like a fortune at the time, but the best money I've ever spent). At that time, renting it would have been about £650 per Month (incidently, this was almost the same as my 95% Mortgage, which was £628 for a five year fix). It's now worth about £250k, and to rent it would cost £1,100 per Month.

So in the case of my own statistically insignificant sample, the value of my property has gone up by around 170% in twelve years, while the rent has "only" gone up by about 70%. On that very limited example,the idea that house prices have risen much faster than rents does seem to have held water.

Of course, my property could be an exception for some reason, and a single property is hardly a representative sample. Perhaps a more likely scenario though (after all, there's no reason wy my property should be exceptional) , is that the difference is due to the fact that I live in London. I don't know what my property would have rented for 18 Months ago, but it would have "only" sold for about £160k as recently as early last year. That's would be an increase of 75% (ish) in 11 years since purchase.

I suspect (but can't know) that these percentages are fairly typical of London property, which imho backs up the view that in the capital (perhaps uniquely), there is a significant speculative element at work along with the very obvious shortage of property in London. The two are of course not mutually exclusive.

the_flying_pig

Generali wrote: »

There is clearly something strange going on: an index of existing rents shouldn't continue to diverge with new rents as it becomes ever more profitable and thus tempting to kick out an existing tenant to put in a new one.

I'm tempted to say that one or other has been badly done in some way.

the homelet indices look like they're quite messy. the estimates of year on year inflation that it comes up with move around all over the place - almost every month the estimate of year on year inflation seems to bounce up or down by at least a couple of percent points. i'd guess that, for starters, it's most likely not mix adjusted in any way?

mayonnaise

Graham_Devon wrote: »

It seems everyone on this board would welcome more housing.

Yeah sure, and when a policy comes along that actually increases supply (HTB1), you're vehemently opposed to it.

the_flying_pig

HAMISH_MCTAVISH wrote: »

...[the ONS] index tracks rents by including the rent of all existing tenants as well as new tenancies.... this would be like compiling a house price index by including the sale price of all houses, even those sold 5 or 10 years ago, as well as current sale prices...

that's not a great analogy tbh.

some stuff, like, er, food, clothing, home ownership, & so on, when you buy it the nature of the transaction is such that it's a one-off.

other stuff like, say, home renting, your phone bill, energy, water, & so on, you, er transact initially but carry on taking stuff from teh same supplier [probably with occasional price reviews] unless you actively decide to switch.

you can, if you like, think only about trends in the prices paid by customers who are switching, and this of course tells you something quite different to thinking about average prices overall. just different - it's certainly not true that the overall average is 'wrong' or using outdated information in the way that your analogy implies.

the_flying_pig

mayonnaise wrote: »

Yeah sure, and when a policy comes along that actually increases supply (HTB1), you're vehemently opposed to it.

point of order:

HTB1 is a policy that increases demand for newbuild only.

HTB2 is a policy that increases demand for all housing, new or old.

neither "increases supply" other than indirectly through higher prices.

cheers.

mayonnaise

the_flying_pig wrote: »

point of order:

HTB1 is a policy that increases demand for newbuild only.

HTB2 is a policy that increases demand for all housing, new or old.

neither "increases supply" other than indirectly through higher prices.

cheers.

HTB 1 increases supply of new builds by increasing effective demand for new builds.

HTB 1 has been shown to have a negative effect on new build inflation.

http://www.mortgagestrategy.co.uk/news-and-features/sectors/products/products-news/help-to-buy-1-slows-new-build-price-inflation/2008498.article

HTB2 is another matter, agreed.