How fast are rents increasing right now?
According to Paragon, rents are increasing by 14 percent a year. It is a shocking rate of growth. If it is true, it suggests that buy to let investments are potentially extremely profitable.
The Paragon management were not shy to promote their rental number. John Heron, managing director of Paragon Mortgages, said: "We have known for some time that the tenure of the UK is changing as a growing and more diverse demographic are choosing private rented homes. There is no doubt tenant demand is following an upward trend. We expect to see further expansion of the private rented sector over the next couple of years."
However, is it true? Fortunately, we don't have to rely on Paragon for information on rental inflation. The government statistical service - the Office of National Statistics - has provided a monthly survey of rents for close to five decades. The rental index forms part of the retail price index. It is easily available to anyone with a computer and an internet connection.
The most recent data, which is April this year, tells us that rental inflation is currently running at about 3.9 percent a year - more than 10 percentage points less than the rate suggested by Paragon.
So who are we to believe - Paragon, the buy to let mortgage provider, or the ONS, the official source for all economic and social data, filled with highly competent statisticians, answerable to Parliament, and a key player in the Eurostat system of accounts? Is it possible that the ONS, one of the most highly respected statistical services in the world, could miscalculate their rental index by a full 10 percentage points? No prizes for guessing which number I choose to believe.
How could Paragon arrive at a rental growth number so radically different from official sources? Perhaps a better question might be where would Paragon get data on rents in the first place to calculate an index?
I am going to take an educated guess and suggest that the data comes from their customers. If this is indeed the case, Paragon shareholders should be sweating. The rental data is almost certainly inflated. In turn, this suggests that many of their customers may well have misled them about their rental income when applying for mortgages.
There is of course another possible explanation. In order to be fair to Paragon, let us consider it for a moment. It might be the case that Paragon is incredibly fortunate. It has a customer base of extraordinary gifted buy to let investors. These people have a highly tuned capacity for identifying properties with enormous rental growth potential, have been able to generate double-digit income growth.
It is also terribly sad that the Financial Times printed what is in my view a highly implausible story. Anyone, with half a grain of intelligence, could sit back and ask themselves are rents really growing that quickly? It seems that the Financial Times found it easier to simply copy the press release rather than write a proper story about rents.
It is sad, but it is what we have come to expect from the mass media in this country. When it comes to reporting housing issues, the newspaper advertising department determines the storyline.
(just for the record, the ONS code for their rental index is CZCQ)