Measures of owner occupiers' housing costs, UK: July to September 2018

• Owner occupiers’ housing costs (OOH) in the UK according to the rental equivalence approach have grown by 1.1% in Quarter 3 (July to Sept) 2018 compared with the corresponding quarter of the previous year.

• OOH according to the net acquisitions approach have grown by 2.6% in Quarter 3 2018 compared with the corresponding quarter of the previous year.

• OOH according to the payments approach experienced growth of 3.6% in Quarter 3 2018 compared with the corresponding quarter of the previous year.

Owner occupiers’ housing costs (OOH) are the costs of housing services associated with owning, maintaining and living in one’s own home. This is distinct from the cost of purchasing a house, which is partly for the accumulation of wealth and partly for housing services.

In this article, we focus on three approaches to measuring OOH: payments, rental equivalence and net acquisitions, and evaluate the performance of the different measures over time, in prevailing economic conditions. The series will be updated on a quarterly basis. We invite you to submit feedback on this release to cpi@ons.gov.uk.

The first article in the series provides more information about the different approaches to measuring owner occupiers’ housing costs to aid your understanding of the differences in concept and underlying methodology. There have also been a number of “Spotlight” sections produced, which focus in on a particular topic. For a list of subjects covered, please see Annex 1. We will continue to produce these Spotlights as and when there is need.

The manner in which revisions to the House Price Index (HPI) and Producer Price Index (PPI) are incorporated into the quarterly estimates OOH(net acquisitions) and OOH(payments) has changed. These changes have been incorporated into this article. The new revisions policy for net acquisitions and payments estimates will enable all revisions to the HPI and PPI to be included in the quarterly estimates to OOH(net acquisitions) and OOH(payments). The impact of this change on the series is small. The spotlight section in this article provides more details on the changes to the revisions policy for our OOH publication and assesses their impact over the series from Quarter 1 (Jan to Mar) 2005 to Quarter 3 (July to Sept) 2018.

The rental equivalence approach is a component of the Consumer Prices Index including owner occupiers' housing costs (CPIH), our lead measure of inflation and a National Statistic, whereas the payments approach and net acquisitions are both experimental indices and therefore we would caution against any use other than for research purposes. More information on the methodology for each approach can also be found in the CPIH compendium.

Figure 1 presents the cumulative indices for each approach and Figure 2 shows the year-on-year quarterly growth rates. These figures take into account the changes to the revisions policy discussed previously. Figure 1 shows that the index for the net acquisitions approach (OOH(NA)) has been consistently higher than the payments approach (OOH(payments)) and rental equivalence approach (OOH(RE)) since Quarter 1 (Jan to Mar) 2009 and Quarter 4 (Oct to Dec) 2009 respectively.

The year-on-year quarterly growth rate of OOH(payments) was 3.6% in Quarter 3 (July to Sept) of 2018. This is the highest growth rate of OOH(payments) since Quarter 1 2011. The year-on-year quarterly growth rate of OOH(NA) was 2.6% in the third quarter of 2018. The year-on-year quarterly growth rate of OOH(RE) remained unchanged at 1.1% in Quarter 3 2018.

This section shows which components are contributing the most to the year-on-year quarterly growth rate for the payments approach (payments) and the net acquisitions approach (NA). Because of the methodology used to calculate the rental equivalence approach of owner occupiers’ housing costs – OOH(RE) – it is not possible to present a contributions chart for this approach. This is mainly because OOH(RE) is not constructed using a set of sub-indices that measure different concepts (for example, maintenance costs and Stamp Duty), but instead is aggregated from indices measuring the same concept across regions.

Payments approach

Figure 3 presents the contributions of the OOH(payments) sub-indices to the quarterly growth rate of OOH(payments). Mortgage interest payments contributed the most to the quarterly growth rate of OOH(payments) in Quarter 3 (July to Sept) 2018 with a contribution of 2.0 percentage points. Major repairs and maintenance continued to make a positive contribution in Quarter 3 2018 at 0.2 percentage points. Stamp Duty also contributed 0.2 percentage points in the third quarter of 2018.

Net acquisitions approach

Figure 4 shows the contributions of the OOH(NA) sub-indices to the year-on-year quarterly growth rate of OOH(NA) in Quarter 3 2018. New dwellings remained the largest contributor to the quarterly growth rate of OOH(NA) at 1.8 percentage points. The components “existing dwellings new to households” and “other services related to ownership of dwellings” are not included due to lack of data and therefore contribute 0 percentage points.

The rental equivalence approach – OOH(RE) – uses the rent paid for an equivalent house as an estimate of the cost of housing services that are consumed. In other words, we value housing services by looking at the cost of the next best alternative to home ownership, namely renting a property. Importantly, OOH(RE) does not capture changes in asset value; rather it measures the change in price of housing services provided.

The payments approach – OOH(payments) – aims to measure the payments related to the ownership of owner occupied housing. This means that all payments that households make as owner occupiers when consuming housing should be included, such as mortgage interest payments, transaction costs and running costs.

OOH(payments) is not our favoured method to measuring owner occupiers’ housing costs (OOH) in the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This is because a consumer price index aims to measure consumption and interest payments represent the cost of borrowing money rather than the cost of consumption. However, OOH(payments) is our preferred measure for the Household Costs Indices (HCIs), which depart from consumption principles, and aim to capture households’ experience of changing prices and costs. For more information about the HCIs please see the article Developing the Household Costs Indices (HCIs).

The net acquisitions approach – OOH(NA) – aims to measure the costs of acquiring a house with household to household transactions netted off. The approach theoretically treats a home as the purchase of a good that is part asset (the land) and part consumable (the house) and excludes the land component from the index. OOH(NA) also includes costs associated with buying and maintaining a house; for example, self-builds and renovations, repairs and maintenance, transfer costs and dwelling insurance.

In practice, while the measure presented here is the best measure of OOH(NA) that we can currently produce, the lack of available source data means that some components are not recorded fully. We therefore advise that OOH(NA) should be used and referred to with caution and it is consequently not our favoured approach of measuring OOH in CPIH.

Table 1 shows the components of these different approaches. For more information about each please see the CPIH compendium or the first article in this series.

We have been improving the system used for calculating the net acquisitions (OOH(NA)) and payments (OOH(payments) approaches to measuring owner occupiers’ housing costs (OOH). This has allowed us to make some changes to improve the estimates, most notably ensuring that revisions to the component indices within both approaches are accounted for when publishing the latest quarterly indices. While this is not in line with the revisions policy for the Consumer Prices Index (CPI) and Consumer Prices Index including owner occupiers’ housing costs (CPIH), OOH(NA) is primarily produced for Eurostat and we are required to include the latest possible input data to these indices.

There are two indices used in the production of OOH(NA) and OOH(payments) that are subject to revisions, namely the House Price Index (HPI) and the Producer Price Index (PPI). Following a review, HM Land Registry extended their revision period of the HPI from the latest two months to 12 months. This came into effect from 13 June 2017 and affects the components of OOH(NA) and OOH (payments) using the HPI. Specifically, the HPI is used in the calculation of the “Stamp Duty” component for OOH (payments) and is also used to calculate the “New dwellings” and “Existing dwellings new to households” components of OOH(NA).

The PPI is subject to five-month revisions whereby the latest five months’ PPI estimates may change. Revisions to PPI estimates affect the “New dwellings” component of OOH(NA) because PPI is one of two data sources used to estimate “Self-builds and major renovations” – a sub-index of the “New dwellings” component in OOH(NA).

The weights for OOH(NA) and OOH(payments) are updated on an annual basis and published in the Quarter 1 (Jan to Mar) update. They are not revised once they have been published. The current year’s sub-indices weights are calculated in Quarter 1 using the previous year’s December and January indices. These sub-indices weights are utilised for the entire duration of the current calendar year, which means that though the December and January indices are subject to revisions during the calendar year, the weights of component sub-indices are not revisable.

What is changing?

Until this release, the revisions policy used in the production of the OOH(NA) and OOH(payments) estimates only incorporated revisions from the beginning of the current calendar year. This meant that not all revisions to the previous year’s HPI or PPI were captured in the current year’s estimates of OOH(NA) and OOH(payments).

Equations 1 and 2 present a visual illustration of the 12-month revisions to HPI and the old revisions system for our OOH publication for a Quarter 1 (Q1) and Quarter 2 (Q2) publication respectively. Assume that the latest OOH quarterly update is Q1 year t as shown in Equation 1. The bar denotes the end and start of a calendar year and the months within brackets denote months subject to revisions in line with the 12-month HPI revisions policy. Under the old revisions system for our OOH publication, only revisions to January and February of the current calendar year were incorporated into the Q1 year t OOH estimates.

Equation 1

Equation 2

Impact assessment of changes to OOH revisions policy on OOH(NA) and OOH(payments) estimates

This section analyses the impact of change to the OOH revisions policy as described in the previous section. Figure 5 shows the 12-month growth rate of OOH(NA) using the old and new revisions policy as well as the differences between the two series. The figure shows that there is almost no difference in the 12-month growth rate of OOH(NA), with only six quarters showing a difference. These differences range from 0.1 to 0.2 percentage points.

Figure 6 shows CPI-H(NA) under the old and new revisions policy from Quarter 1 2006 to Quarter 3 2018. The figure shows that CPI-H(NA) is unaffected by the changes to the revisions policy of OOH. In all quarters, the difference between CPI-H(NA) under the old and new revisions policy is zero to one decimal place.

Figure 7 shows the 12-month growth rate of OOH(payments) indices using the old and new revisions policy along with the differences between the two series. The figure shows that the growth rate of OOH(payments) is virtually unaffected by the change to the revisions policy. There are only five quarters in which there is a difference between the two series and the magnitude of these differences is 0.1 percentage points.

Figures 8 shows the 12-month growth rate of CPI-H(payments) from Quarter 1 2006 to Quarter 3 2018 under the old and new revisions policy. The figure shows that the growth rates of CPI-H(payments) are identical under the old and new revisions policy to one decimal place.

This is a list of topics that we have focused on in previous publications:

Spotlight: the relationship between private rents and house prices

Spotlight: owner occupiers’ housing costs in the RPI

Spotlight: analysis of revisions to OOH(RE) expenditure weights

Spotlight: changes to methodology

Spotlight: exploratory analysis of the impact of errors in the OOH stratum weights

Spotlight: changes to methodology of the OOH(payments) approach