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Categorized | Property

Data experts admit housing inflation error


Posted on January 30, 2015

File photo dated 12/07/12 of an aerial view of houses on residential streets in Muswell Hill, north London, as rents have increased at six times the rate of inflation over the last year and there appears to be "a new fire in the market" as it enters 2015, a lettings index has found. PRESS ASSOCIATION Photo. Issue date: Friday January 16, 2015. Across the course of 2014, rents increased by 3%, according to the latest index from estate agents Your Move and Reeds Rains. This is six times the Consumer Price Index (CPI) rate of inflation, which fell to 0.5% in December, its lowest level on record. The average monthly rent across the country stood at £767 in December, compared with £745 in December 2013. However, on a month-on-month basis, rents edged down slightly, by 0.1% between November and December. See PA story MONEY Rent. Photo credit should read: Dominic Lipinski/PA Wire©PA

The Office for National Statistics admitted on Friday that it had badly underestimated the increase of costs of private renting in its inflation statistics and that prices had risen at roughly twice the officially recorded rate.

With private renting only a small part of households’ overall spending, the errors would not have had a large effect on overall consumer price inflation. But they did severely distort the CPIH measure

, which includes owner occupiers’ housing costs and which statisticians want to become the headline rate.

    Analysts said the new and higher estimates for rent inflation were more realistic and helped to relieve fears of a bubble in house prices.

    In early 2013, the ONS decided to revamp the collection and measurement of private rents, using a Valuation Office Agency database, but the inflation figures were soon challenged. After initially resisting a review, the increasing disparity between ONS data on private rents and those collected elsewhere forced the issue, and the ONS found analytical errors in the way it had been analysing VOA data.

    The main problems arose where rents were not collected for a property on a regular basis. The statistics agency either assumed they were unchanged for 18 months or rejected the data completely, rather than substituting rent changes in similar properties.

    These procedures and others all gave a downward bias to the rent inflation figures leading to an estimate of 1.2 per cent annual rent inflation between January 2011 and December 2014 — far lower than the latest estimate of 2.1 per cent. The gulf was wider in the years before 2011.

    With private rents rising faster than the ONS thought, the jump in house prices during the past two years was easier to explain. James Carrick of Legal & General said that on the old measures, “house prices appeared severely overvalued” compared with rents, and were in bubble territory. The upward revisions to rents made high house prices seem more reasonable.

    David Whittaker, managing director of Mortgages for Business, said: “Rents have been rising much faster than the ONS previously estimated, and this is no surprise to those in the industry.”

    Private rents are a component of the headline consumer price index, but the ONS said that in the 18 months when the errors were part of the series, measured inflation would have been considerably less than 0.1 per cent higher, leading it to conclude that there was no need for a revision to the series.

    It has decided, however, to revise the CPIH measure, which includes an estimate of the costs of owner-occupied housing. The ONS used private rents as a proxy for the costs of ownership, reasoning that people who owned had the option of selling and receiving the same housing services — shelter, location and amenity — from private renting.

    The CPIH measure was understated by about 0.1 percentage points every month, the ONS said, adding that it would produce a revised back-series in March.

    Paul Johnson, director of the Institute for Fiscal Studies, who led a recent review of inflation statistics, welcomed the changes that would be made to CPIH, which was his favoured option for a headline inflation series once such problems had been ironed out.

    “The reason CPIH was stripped of its national statistics kitemark was entirely down to the measurement of private sector rents and not the methods of estimating the costs of owner-occupied housing,” he said.

    “Once it is happy with estimates of private sector rent inflation, the ONS will be in a position to move to using CPIH as the main measure of inflation.”