Tuesday, 20 May 2008

Rents - are they increasing by 14 percent or 3.9 percent?

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)


CWS said...

Paragon has a commercial interest in promoting the idea that rental growth is high.

There number should be ignored. It is just investor hype.

Sweep the streets said...

Will paragon be around next year to produce an April 2009 index?

aSteve said...

I'd be inclined, first, rather than ask if the figures are honest - to ask if they are credible.

Would you consider a company that has lost over 80% of shareholder value in under a year to be credible?


Paragon need a suffix:"e".

Alice Cook said...


you mean I have been spelling Paragon incorrectly!!

I am shocked.

As for the honesty or otherwise of Paragon, data can often tell you what you want to hear.


Anonymous said...

>3.9% here Leics.

aSteve said...

LOL @ Alice.

Para...gone - as in "no longer a viable business!"

P.S. Don't worry, Anonymous in Leics, expect negative rent inflation really soon. It's had the greatest increase in weight in the official inflation statistics of any single constituent in the past 10 years. High weights imply falling future prices in the world of inflation targeting monetary policy. ;)

Alice Cook said...

Asteve, I got the joke the first time.

I might post something on paragone tomorrow.


aSteve said...

Ah, but we have to keep it obvious, you're read by estate agents. ;)

Anonymous said...

Good post.

I've been expecting reduced rents in London to kick in from mid-2008 due to fundamentals:

- Declining rental population as immigrants return home;
- Stalled or declining salaries due to recession;
- End of the "spend half my money on accommodation" meme;
- BTL speculators deciding they can't flip the apartment so now they must find a tenant to generate cash flow;
- Overbuilding of 1 and 2 bed apartments. Such as around Vauxhall, Canary Wharf and Stratford.
- Lack of pricing power due to other costs taking up people's money e.g. petrol and food
- Ability of renters to "trade down" into flatshares rather than taking the whole thing for themselves.

For what it's worth, I've been on a rolling one month contract the past three months so I'm ready to move somewhere nicer when it happens.

My anecdotal evidence of rental increases is this:
- From 1997-2000 I rented a double room in a house-share 10 min from Tooting underground for £404pcm
- In 2006 I rented a similar room 3 min from Wimbledon Park for £500pcm (i.e. same distance to town, slightly nicer area)
- Now I pay £900pcm for a two bed flat very near Waterloo
For me, rent prices have been far below CPI increases for ten years.


RenterGirl said...

Blimey! Estate Agents being partial to the occasional market boosting fib? I'm shocked and amazed to hear that...

Mark Wadsworth said...

Rents are the most stable variable in the property market, and increase broadly in line with net earnings, this is because housing is a 'normal' good.

So if net wages go up 4% nationally, then average rents will also go up 4% (subject of course to regional variations, but so what? If you live in an area where wages are going up quickly, then the chances are that your wage is going up just as quickly, so you ain't too fussed about your rent going up).

Which all gets back to yet another argument for land value tax. If rents go up (because businesses are doing well) then who should benefit - the businesses and their employees, or the people who happen to own land and buildings in which the businesses are carried on and in which the employees live?

powerman said...
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powerman said...

Why should owning land as opposed to any other form of capital asset particularly morally oblige you to fund public services ?

Wouldn't it be better to stop trying to control the price of lending, which is the root cause of cyclic famine and feast in the supply of credit?

Mark Wadsworth said...

Powerman - there are no morals in tax.

It is a simple observation that increases in land values are 99% unearned - however high you tax the pure land/location value, it does not disourage enterprise, investment and work - the landowner just sits there and does nothing, his land will go up or down in value whatever he does.

As opposed to the taxes that businesses and employees in my example have to pay - and you can see the higher rents that they have to pay as a kind of 'tax' - these discourage enterprise, work and investment.

Obviously, the value of buildings and improvements should be excluded from any land value tax.

Mark Wadsworth said...
This comment has been removed by the author.
aSteve said...

Mark... if there are no morals in tax, there is no basis for land tax.

The only justification for a land tax is that government has an ethical responsibility to promote social mobility. No other justification even begins to hold up to scrutiny. The simple fact that land is not homogeneous is a nightmare that means that taxes, in practice, will be imposed subjectively and in a partisan way which might easily be even more partisan than the current system.

I like land tax, but to suggest that it is obviously right independent of religious/political beliefs is an utter nonsense.

Mark Wadsworth said...

OK, my morality is that I believe in small-government free-market liberal economics, and LVT is the tax is least inimical to that. Uncle Milt said so as well.

As to how it would work in practice, see here.

Anonymous said...

Tax is immoral in all forms. It's very difficult to make the argument that the government has the moral right to steal the fruits of your labour and give it to someone else.

I'd say it's impossible to make the argument according to procedure. The best you can do is make a flimsy "end result" argument that a world with taxes is better than one without.

And even then, you are assuming the government isn't just a shameless collection of theiving bureaucrats.


Mark Wadsworth said...

The gummint has no 'moral' right to 'steal' anything, in particular not the 'fruits of your labour', but as there is such a thing as 'public goods' (law'n'order, defence, legal system, refuse collection - which together cost less than 10% of GDP and certainly 'add value') these have to be paid for somehow.

And LVT is a million miles away from 'stealing the fruits of your labour', it is taxing totally unearned windfall gains. It is the least distortionary tax, and has more beneficial than harmful effects.

Anonymous said...

Personally, I'd like to see a constitutional republic where the government is tiny and exists only to maintain public order, enforce contracts, break up monopolies and defend the territory. Something like what the US almost had after the Constitution was ratified.

What the government shouldn't do:
- Education
- Quangos
- Industry
- Bureacracy for the sake of it
- Empire
- Subsidies to any industry

What little tax must be raised would be best off as low flat tax on income and VAT on all consumption. There's no reason someone on £80k should pay 27 times more tax than a minimum wage worker to enjoy the same public goods.


Mark Wadsworth said...

Nick, I share your dream about the ideal size of the state, but you are completely changing the topic. LVT is still a less-bad tax than income tax, whichever way you cut it. And VAT is the shittest tax of all (with National Insurance a close second).

Anonymous said...

I haven't given a lot of thought to LVT. Income tax is the worst type because it punishes work. Consumption taxes are the best because they punish consumption and thus encourage saving (and therefore capital formation and independence). I'm not so averse to windfall taxes so long as they aren't just politically motivated (e.g. the periodic "excess profits" taxes)


Mark Wadsworth said...

Aaaargh! 'Consumption taxes' are the same as income taxes but far worse - there's no deduction for expenses!

In a service economy (or even labour-intensive manufacturing), one man's consumption is another man's production. If you want to punish or deter consumption, you might as well chain up attack dogs and wild animals outside every shop, cinema and pub. What good would that do for the economy?