Despite the fact that inflation in the UK, and throughout most of the Western World for that matter, is close to zero, if anything can buck the trend and keep edging up, with the exception of cigarettes, it is rental prices. The Office for National Statistics (ONS) figures released in December last year showed that, since the financial crisis in 2008, housing costs in the UK leapt by 36% for tenants, while falling 3.2% for homeowners/landlords.
The figures show that average weekly rent costs rose to £90.20, up from only £66.30 in 2008, while mortgage holders spent £143.80 a week on average, down by £5 since 2008. This is despite average house prices rising by 31.6% since Q1 2009 (Nationwide figures). It was in Q1 2009 that the Bank of England (BoE) cut the base rate to just 0.5% where it has remained ever since. The lower housing costs for homeowners are simply a reflection of lower mortgage rates, thanks to a record low base rate.
When you look at the rise in average UK rents of 36% since the crisis, it is only slightly higher than the rise in property prices during the same period. The question is 'which is leading and which is following?' Do rising rents lead to higher property prices or is it the other way around? Or are they less correlated than many people think?
The accumulated total inflation using the consumer price index (CPI) from 2008 to end-2015 is 21.6%. However, the retail price index (RPI) includes housing costs and is obviously a truer reflection of inflation. For example, between 1988 and 2014, the total CPI was 107% but the RPI was almost 40% higher at 149%. However, the RPI only includes the cost of mortgage payments, which have been helped dramatically by a record low base rate. Were it to include actual house prices then the total RPI inflation figure would have been far higher.
Either way, it came as no surprise when in January 2013 the ONS announced its conclusion that the RPI 'did not meet international standards' and was no longer formally ranked as a UK National Statistic. In an era of austerity, cut backs and wage freezes, Government knows that it is far better off convincing the public that inflation is extremely low.