Response. Response to National Statistician s Consultation on changes to the Retail Price Index. Research and Futures. Tel:

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1 Response Response to National Statistician s Consultation on changes Contact: Team: Javier Stanziola Research and Futures Tel: javier.stanziola@housing.org.uk Date: November 2012 Ref: RE.IN.2012.RS.07 Registered office address National Housing Federation, Lion Court, 25 Procter Street, London WC1V 6NY Page 1

2 The National Housing Federation submitted a response to the ONS consultation on changes and changes to the way private rents are estimated for both RPI and CPI. Whilst we understand the rationale behind some of the proposed changes, we have concerns about the proposed implementation timetable. Housing Associations are allowed to set rent increases at RPI plus 0.5 per cent (plus or minus 2). They also hold inflation-linked investment to fund additional social and affordable housing. The proposed changes will have a significant impact on revenue projections for the sector and its ability to invest in new homes. The proposed timetable would allow a very limited time to assess implications and alter business plans. It is our view that the proposed changes should be applied from March 2015 (rather than 2013 as proposed) to allow sufficient time for Housing Associations, and other sectors where revenue projections are linked to RPI, to assess the financial implications of these changes. 1.0 Proposed changes to RPI For ONS, addressing the so-called formula effect gap between the CPI and RPI has been a priority for a number of years. ONS estimates that around one percentage point of the difference between RPI and CPI can be explained by the different formulas used for their calculations. This has also meant that RPI usually changes at a higher rate than CPI. For the past eighteen months, ONS has conducted research to better understand, explain and eliminate any unjustifiable differences between these indexes. The National Statistician has published a consultation document to invite users views on two issues: 1) Changes to the RPI formulae: The ONS is considering four options. They are all about the formulae used to calculate RPI, and not about the basket of goods and services used in its calculation. Option 1: No change Options 2 and 3: Modify some of the steps used to estimate RPI, reducing but not removing the formula effect gap Option 4: Change the RPI so that its formulae align fully with those used in the CPI. This would remove the formula effect gap between the RPI and CPI, though there would remain differences in estimates. 2) Changes to the way private housing rental prices are measured in the CPI and RPI: ONS currently uses data on private housing rentals from letting agents in 141 locations throughout the UK for its calculation of both the CPI and RPI. ONS is now considering using private housing rental data from the Valuations Office Agency (VOA). These figures will be complemented by data from the Welsh and Scottish Government and Northern Ireland Executive to provide UK wide estimates. As a result of these changes, instead of using 1,200 quotes each month to calculate private housing rental figures, the ONS will be using around 800,000 quotes. 2.0 Likely Outcome of the Consultation It is likely that the way RPI is calculated will be changed. It is widely accepted in international policy, financial and academic circles that the way 30% of RPI is calculated has a built-in bias towards inflation (i.e., it tells us there has been inflation even when there is no increase in prices overall). Furthermore, these changes could Page 2

3 save Treasury between 2-3bn a year cumulatively on the cost of servicing its debt, according to the FT and the Telegraph. Options 2 and 3 would reduce RPI by between 0.25 to 0.95, according to ONS, KPMG and other commentators. Option 4 would reduce RPI by between 0.90 to 0.95 percentage points, according to KPMG. On the other hand, ONS estimates that changes to the way private rentals are measured would increase RPI by 0.09 percentage points, and increase CPI by 0.05 percentage points. The Bank of England will be consulted on whether any changes to RPI would be materially detrimental to the interests of holders of relevant index-linked gilts. If they find that to be the case, the agreement of the Chancellor will be required before any changes are implemented. If any change were agreed, ONS would implement the new methods starting in February 2013, for publication in March Impact on Housing Associations The proposed changes will have a number of positive and negative effects on the sector. The overall impact will depend on individual circumstances, but could be easily assessed by each Housing Association to reduce potential revenue and asset risks. Potential effects include: Changes to RPI could decrease the rate of rent increase Housing Associations are allowed to charge A lower RPI could mean lower wage settlements, with implications for cost control measures Benefit payments are likely to be affected marginally as they are now linked to CPI Pension plan obligations could decrease, but Housing Association Reserves may be affected by lower real returns on bonds and other investments. The current rent formula ends in 2015, so members business plans may be detrimentally impacted in 2014, if changes are implemented in March Housing Associations are likely to need additional time to assess the implications of these changes after 2015 and to better link the proposed changes with the current spending review period. 4.0 Summary response to ONS Whilst we understand the rationale behind some of the proposed changes, we have concerns about the proposed implementation timetable. Housing Associations are allowed to set rent increases at RPI plus 0.5 per cent (plus or minus 2). They also hold inflationlinked investment to fund additional social and affordable housing. The proposed changes will have a significant impact on revenue projections for the sector and its ability to invest in new homes. The proposed timetable would allow a very limited time to assess implications and alter business plans. It is our view that the proposed changes should be applied from March 2015 (rather than 2013 as proposed) to allow sufficient time for Housing Associations, and other sectors where revenue projections are linked to RPI, to assess the financial implications of these changes. Page 3

4 4.1. Full Submission to ONS Options for improving the Retail Price Index Which option proposed would you prefer? Please enter in the box to indicate your response For any changes to be implemented with sufficient time for Housing associations and other businesses and bond holders to assess and adapt to the implications of the changes Option 1) No change. The reasons for the formula effect have been identified, explained and understood. Option 2) Stop using the Carli to estimate price change for clothing, with options of the method to be used in its place. This would reduce but not remove the formula effect as some differences between the RPI and CPI formulation would remain. If you support this option which formula do you prefer? Dutot Jevons Option 3) Stop using the Carli for all items in the RPI. Replacing the Carli with either the Dutot or the Jevons would reduce the formula effect to a minimum, although some difference between the RPI and CPI formulation would remain. If you support this option which formula do you prefer? Dutot Jevons Option 4) Change the RPI so that its formulae align fully with those used in the CPI. This would remove the formula effect between the RPI and CPI, though there would remain differences in estimates because of the different coverage, weights and scope used in each. What are the methodological considerations behind your preference? The National Housing Federation ( represents 1,200 independent, not-forprofit housing associations in England and is the voice of affordable housing. The Federation s mission is to support and promote the work that housing associations do and campaign for better housing and neighbourhoods. Housing associations are independent organisations that provide homes for more than 5 million Page 4

5 people in England. Most of these homes are rented with rents fixed by the Government, linked to RPI. In addition, a significant minority are sold through a variety of low-cost home ownership schemes. We are not in capacity to comment on the details of the methodologies behind the different proposed indexes, but understand the rationale behind the proposed changes. We do have concerns about the proposed timetable for implementing these changes as discussed below. Do the options for improving the RPI have any impacts you would like to make the National Statistician aware of? Housing associations should be part of the list of users and main uses of RPI you include as Annex A in your Consultation document. They are allowed to set rent increases at RPI plus 0.5 per cent (plus or minus 2). They also hold inflation-linked investment to fund additional social and affordable housing. The proposed changes will have a significant impact on revenue projections for the sector and its ability to invest in new homes. The proposed timetable would allow a very limited time to assess implications and alter business plans. It is our view that the proposed changes should be applied from March 2015 (rather than 2013 as proposed) to allow sufficient time for Housing Associations, and other sectors where revenue projections are linked to RPI, to assess the financial implications of these changes b) Private housing rentals Do you support the proposal to change the source for the data for private housing rental prices? YES X NO Please provide any comments you would like to make in respect of this proposed change: On the basis that these figures will be drawn from a much larger sample than any other source, the move to using VOA private rental data is a welcome move. It is not clear, however, what principles will drive the rent officers in their selection and recording of rent values. It will be important to ensure that there is no consistent bias in their method. The rent officers handbook is clear about the principles but not very specific about method. Page 5