PRS recovery: still sustained... still weak
Key Points
The IPHRP grew 1.3% in the twelve months to August – the fourth consecutive month rental prices have grown by this amount.
This may be a period of rental price growth, BUT that growth in rental prices continues to lag behind inflation: Landlords are putting up prices below the cost of living. They have done so for 31 consecutive months.
There is however some evidence that the IPHRP has been growing at an accelerated rate since June 2018.
In the regions, the South West had the greatest level of rental price increases in August (2.0% per annum). The North East had the lowest level (0.6%pa).
Recovery of the rental market in London continues to be fragile. Evidence continues to suggest rental price growth in the capital is below the national average and at a level considerably below that experienced in late 2015, early 2016.
Overall change - positive
In August, the IPHRP grew by 1.3% compared to the same month last year. This means that a property that was rented for £500 per month in August 2018, which saw its rent increase by the average rate in the UK, would be rented for £506.50 in August 2019 (example provided by the ONS).
This is the fourth consecutive month – going back to May – that the IPHRP has grown by 1.3%. You must go back to Sept-Dec 2017 to find four consecutive months in which annual growth was stronger.
It is also June-July 2018 that the IPHRP last fell on a monthly basis (from 1%pa to 0.9%pa), so it is now 13 consecutive months since the growth in rental prices fell – at least as measured nationally.
IPHRP has been 1%pa or above every month in 2019 – in fact, since December 2018.
Comparison with other price indices – less positive
The evidence still indicates that, although rental prices are growing, they are still doing so below the rate of inflation.
Chart 1 below shows that both the CPI and CPIH have fallen (for common, non-housing based reasons) in August. The ONS state that the CPI and CPIH are now at their lowest since late 2016. Nevertheless, price rises in the wider economy are still higher than private rented housing prices:
Chart 1: Comparison of chart indices - UK, 2019
The last time the annual growth rate in the IPHRP exceeded either of the other two measures was in January 2017.
This is the 31st consecutive month private rented house price growth has been below either of the main measures of price change.
Longer term trends
Chart 2 below illustrates longer term trends in these measures of price change:
Chart 2: UK Private Housing Rental Price (IPHRP) index c/w other price indices (2015=100)
The CPI/CPIH has clearly risen at a much faster rate than the IPHRP since 2017. The indexed values for both the CPI and CPIH have been greater than that of rental values since April this year. Since April there has been some convergence in the three indices.
For the indexed IPHRP there has been a clear change in direction to a flatter growth line since January 2017 (Pivot 1).
In January 2015 the index was 100, in January 2017 it was 104.8 (growth of 4.8 points) and in January 2019, 107.1 (growth of just 2.3 points since Jan 2017). So growth in the index of prices between January 2017 and January 2019 was less than half that between January 2015 and January 2017.
However, in June 2018 (Pivot 2), the index was 106.3, in August 2019 the value is 107.9. This is growth of 1.6 points in the index: You have to back to January 2017 before the index was 1.6 points below the June 2018 figure.
In other words, the growth of the IPHRP index has risen in the fourteen months since June 2018 by the same amount as in the seventeen months prior to June 2018.
This itself hardly shows recovery – seasonal factors, policy changes and the wider economic environment would all need to be factored into any econometric model. BUT this observation DOES provide at least some evidence to underpin the “weak but sustained” growth indicated in the RLA’s previous blog on the IPHRP.
The regions
Chart 3 below presents the IPHRP across the English regions and compares the growth in private house prices in each region to that of England as a whole. Chart 3 also presents the data for Wales:
Chart 3: Annual Rental Price Growth - England & Regions, Wales; Jul-Aug 2019
A previous blog noted a strengthening of private rental prices. If anything, this month there has been a slowdown in price growth:
In England as a whole price growth fell from 1.4% per annum in July to 1.3%pa in August.
This decline was common across the regions – in six of the nine English regions the IPHRP fell, whilst remaining constant in the other three.
Yorkshire and the Humber experienced the greatest cool-off – down to 1.6%pa growth from 1.9% in July.
In recent months the IPHRP has experienced the strongest growth in the East Midlands. In August it was in the South West region. The South West region was the only region in which rental prices grew 2%pa.
The only regions in which growth was less than 1% were the North East (0.6%pa) and London (0.8%). In both these regions, price growth was lower in August than in July.
Wales experienced growth in the IPHRP – in August the index grew 1.2% over the previous 12 months.
London rental prices – still south of the river
In a previous blog post on the IPHRP there was a focus on London: The analysis concluded that growth in the IPHRP – limited though that was – was still largely a product of rental markets outside the capital.
The chart below compares the year-on-year change in Private Rental House Prices with that of both England, and the East Midlands. The East Midlands has had noticeably strong rental price growth through until the start of 2019. Since then, even though growth rates have fallen, they have still been consistently above 2%pa – at least until August:
Chart 4: growth in Private Rental House Prices (IPHRP): England c/w London & East Midlands
London prices, literally, fell off the scale in 2018, with negative growth (price reductions) for most of the year. Even though throughout 2019 there has been growth, this recovery has been fragile – only since May have prices risen above 0.5%pa.
This chart shows just how far prices have slowed down/fallen in the capital – in 2016 price growth was running at almost at 4%pa. In fact, for four months (August-November) in 2015 annual rental growth was over 4%pa.
The more recent, sustained and dramatic fall in rental price growth is further evidence in explaining the affordability gap in rental prices: Since 2015, real wages have flatlined – at least until the present, pre-election surge since the start of 2019. The above chart is hardly evidence for the case for intervention via mechanisms such as rent control.
The problem rent controls purport to solve – excessive and sustained growth in prices with no market correction – is not justifyable on these grounds.
This article has been written by Nick Clay of the NRLA. The views here are those of the author and not necessarily those of the NRLA itself.
The NRLA reserve the right to clarify and correct the information and analysis in subsequent revisions of this post.
Please note, the data presented here is often revised by the ONS. The NRLA may or may not revise the analysis accordingly.
