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How are rising rents affecting the UK’s cost of living crisis?

Private rental prices for UK housing are increasing at their fastest rate since July 2016. But there is regional variation, with rents going up more in Scotland, while almost stagnant in London. Private sector data suggest that rises will continue, further fuelling the cost of living crisis.

New experimental data released by the Office for National Statistics (ONS) suggest that the average cost of renting a house in the UK was 2.4% higher in March 2022 than a year earlier. Rental prices have been increasing steadily since 2015 (see Figure 1), but the rate of increase has spiked for those living outside London since early 2021. Excluding the capital, rents have gone up 3.3% in the last year.

Figure 1: UK rental prices since January 2015

Source: ONS, Index of Private Housing Rental Prices
Note: Data presented are classified as experimental statistics. More information available here.

Prices in London grew only 0.4% in the last 12 months (see Figure 2) – six times smaller than the next lowest English region. But this discrepancy can be explained by two complementary forces.

First, the pandemic has reduced property demand there. This is because more people are working remotely, making inner-city accommodation close to offices less important. Fewer international tourists also means less short-term letting. Second, data from Rightmove imply that an excess of housing has created choice for renters and pushed prices down.

But the London housing market tends to have larger peaks and troughs in rental prices compared with the rest of the UK. This means that a sudden jump later this year cannot be ruled out, as the effects of Covid-19 on the economy recede.

Figure 2: Rental price growth since 2016 – annual percentage for private housing

Source: ONS, Index of Private Housing Rental Prices

Comparing growth across the UK nations, prices in England (excluding London) and Scotland are rising at their fastest rates since data collection began in 2006 and 2012, respectively. Welsh rental price growth is only half that for English regions, at 1.6%, while Northern Ireland is a high outlier, at 6.5% (although new data to be released in June will provide more clarity on the latter).

Understanding the construction of these ONS price series is vital for predicting what will happen next for rent levels. The figures quoted so far come from the Index of Private Housing Rental Prices (IPHRP), which uses data provided to the government for day-to-day activities like health records.

These data are a stock made up of existing rental agreements between tenants and landlords, as well as newly advertised property rents. The distinction between these two types is important because the latter tends to be more responsive to current market conditions. Existing renters generally sign six to 12 month contracts, so their rents change more slowly.

Figure 3 shows the annual price growth of newly advertised rental properties measured by three estate agents, alongside the ONS data. Average price growth in March 2022 on the private sector measure is 10.2%. This is more than four times the ONS figure and equivalent to a £63 increase in monthly payments for new renters outside of London compared with last March.

This flow of new renting is analogous to adding hot water to a bathtub (the stock of existing rental agreements) – it takes a while for the whole bath (stock) to heat up (Jenkins, 2020). This is why the ONS data moves in the same direction as the private sector measure, but with a lag.

Figure 3: ONS and private sector measured rental price growth

Source: HomeLet, Rightmove, Zoopla and ONS

The fact that the private rental measures continue to increase – and the ONS rate historically operates with a lag of about six months – suggests that rental prices are set to rise further over the coming months.

This is worrying for households already struggling with the cost of living crisis. Housing and household services were the largest contributor to the 6.2% March inflation figure, which was the highest rate of price increases in 30 years.

Soaring energy bills made up the bulk of this contribution, but rising rents also pushed up owner-occupiers’ housing costs. Neither show signs of abating, which suggests that those looking for hints that inflation is peaking will have to look elsewhere in the data.

Where can I find out more?

  • The full data release for private housing rental prices in March 2022 is available here.
  • Previous data are also available here.
  • This article by Chris Jenkins explains the methods the ONS uses to measure prices in the housing market.

Who are experts on this question?

  • Christian Hilber
  • Paul Cheshire
  • Ian Mulheirn
  • Kenneth Gibb
Author: Ben Pimley
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