Today has brought news on one of the main themes of my work. For newer readers the short version is that inflation is housing is under recorded meaning that we are worse off than we are told. The main impact is on first time buyers who find themselves paying ever more for property but that not being reflected in the official inflation statistics. At the moment this is an especially moot point with even the official inflation numbers so high,
The particular version of this that has appeared today is in rental costs and it is literally close to home for me as it majors of London. So let me hand you over to the Financial Times.
Private tenants in London are facing “increasingly unaffordable” rents, the homeless charity Shelter has warned, as high demand and a shortage of properties in the capital has led to intense competition to secure accommodation.
The shortage has led to landlords demanding that prospective tenants compete in a bidding process for properties, while others were being asked for up to 12 months’ rent in advance, according to Ruth Ehrlich, Shelter’s policy manager.
I have heard stories of that happening in my part of town ( Battersea ) from friends and neighbours in recent times. That tallies with what we are being told here.
“We are hearing from people every day who are battling increasingly unaffordable private rents, who are struggling to find somewhere to live,” Ehrlich told the Financial Times’s Money Clinic podcast. “And when they do, they’re being forced to jump through really extreme barriers just to access that home.”
The idea of things being unaffordable in terms of buying property has been around for some years although of course it is always officially denied. Such official arguments are more difficult as we have seen higher mortgage rates. But returning to London rents we are told this.
Research from property site Zoopla found that rental growth in inner London was running at nearly 20 per cent in the first quarter of 2022 and was at 10 per cent in outer London. That compares with growth of around 2 per cent in the first quarter of 2019.
The situation certainly sounds very fevered.
One letting agent asked how much he was willing to offer on a property for rent, warning him that others were offering £300 over the asking price. Last week, he went to seven viewings, adding that about half the properties he saw listed online had been snapped up by the time he responded. “I called for a property I saw listed the same day, and the estate agent said ‘I’ve already given out 30 spots for viewing.’”
Charging to view a property feels like something which should be illegal if it is not already.
Some prospective tenants said they were being charged simply to view properties. Daniel, 25, who also did not want his surname used, said he was asked to pay a £600 deposit to view a three-bed home in the London Fields area, equivalent to one week’s rent.
The cause seems to be a shortage of supply. Although at this point I would just like to point out that according to the media so many have left London, so if their stories are consistent how does this work? Plus the idea of a lack of housebuilding does not chime with the enormous amount of building not only in Nine Elms but around that area. I realise that they are flats not houses but that scale of building was and is large.
Supply of private rented accommodation has fallen sharply in London to a five-year-low after buy-to-let investors sold up or reduced their exposure during the coronavirus pandemic…..Tsuman said a lack of housebuilding and landlords selling up — initially because of the introduction of a stamp duty surcharge in 2016 and then to take advantage of soaring house prices during the pandemic — meant demand was far outstripping supply.
For some the situation seems to be even worse as things get bid up and the topic gets linked to the ongoing cost of living crisis.
But agents said in many cases much higher rent increases were being pushed through. “We’re seeing reports of 40 per cent rent increases year on year, and on top of the cost of living crisis, it’s pushing a lot of families into financial hardship,” said Gregory Tsuman, director of lettings at Martyn Gerrard estate agents in north London and president-elect of trade body Propertymark.
So renters in London will be looking up Gwen Guthrie on Spotify.
‘Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
The Problem With The Official Inflation Numberrs
Let me start with the official numbers for the UK.
Private rental prices paid by tenants in the UK increased by 3.0% in the 12 months to June 2022, representing the largest annual growth rate since this series began in January 2016.
Okay so there is not much growth elsewhere but London is surging? Actually they tell us the opposite of that.
The East Midlands saw the highest annual growth in private rental prices (4.3%), while London saw the lowest (1.7%).
So let us look in more detail at the situation as reported in the official numbers.
London private rental prices increased by 1.7% in the 12 months to June 2022, up from an increase of 1.5% in May 2022, the highest annual rate since February 2017. Despite this, London’s rental price growth in June 2022 remains the lowest of any of the English regions.
So barely a flicker and the change may even be within the margin of error. How are they missing this? It is due to what they measure.
These supply and demand pressures can take time to feed through to the Index of Private Housing Rental Prices (IPHRP), which reflects price changes for all private rental properties rather than only newly advertised rental properties.
The measure to some extent merges stock and flow as it does this.
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.
I recall this coming under fire at a meeting at the Royal Statistical Society with the point being made that when we measure the price of baked beans we measure it now rather than going to out cupboards and seeing what we paid for them as well. Apologies to foreign readers as baked beans are a particularly British food staple.
Comment
We can start with the failings in the official rental series which is completely missing a development that is adding to the cost of living crisis and causing genuine hardship. But it is worse than that and let me show you via an official release.
Given that the owner occupiers’ housing costs (OOH) component accounts for around 17% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates. The inclusion of Council Tax and rates in CPIH is the only further difference in coverage. This makes CPIH our most comprehensive measure of inflation and, therefore, the figures in Section 3 and overall commentary in Section 4 in this bulletin focus on CPIH.
The problem is that they use the flawed rental numbers as their guide for owner occupier costs. This is of course a complete fantasy as why would you own if you had to pay rent? But as you can see it is reducing the “most comprehensive” measure of inflation which has fantasy rents (3%) for 17% of it meaning that it gives a lower answer than other measures.
If you look at the methodology you might reply it should catch up ( in around 14 months). But we are in that sort of territory now as other measures of rental inflation have been picking up rises for some time. But all we have is a 3% rise via the official numbers. Something is very wrong I think but because so few understand it there is little or no publicity.
There is also an irony in the Financial Times pushing the rental argument as its own economics editor Chris Giles has been a strong supporter of CPIH and thus the use of the rental numbers above.