Measures of owner occupiers' housing costs, UK: October to December 2018

• Owner occupiers’ housing costs (OOH) in the UK according to the rental equivalence approach have grown by 1.1% in Quarter 4 (Oct to Dec) 2018 compared with the corresponding quarter of the previous year.

• OOH according to the net acquisitions approach have grown by 2.5% in Quarter 4 2018 compared with the corresponding quarter of the previous year.

• OOH according to the payments approach experienced growth of 4.0% in Quarter 4 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 several “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.

You should note that the payments approach and net acquisitions are both experimental indices and so 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. Figure 1 shows that the index for the payments approach (OOH(Payments)) has been consistently lower than the net acquisitions approach (OOH(NA)) and rental equivalence approach since Quarter 1 (Jan to Mar) 2009.

The year-on-year quarterly growth rate of OOH(payments) was 4.0% in Quarter 4 (Oct to Dec) 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 2.5% in the fourth quarter of 2018. The year-on-year quarterly growth rate of OOH(RE) remained unchanged at 1.1% in Quarter 4 2018.

This section shows which components are contributing the most to the year-on-year quarterly growth rate for the payments approach (OOH(payments)) and the net acquisitions approach (OOH(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 4 (Oct to Dec) 2018, with a contribution of 2.6 percentage points. Major repairs and maintenance continued to make a positive contribution in Quarter 4 2018 at 0.3 percentage points. Stamp Duty contributed 0.2 percentage points in the fourth 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 4 2018. New dwellings remained the largest contributor to the quarterly growth rate of OOH(NA) at 1.7 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 for 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.

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

Spotlight: changes to OOH revisions policy