Housing associations look away now. Just two months after a fall in the retail price index (RPI) triggered rent cuts from next April, inflation is rising again - and a change to the way it is calculated will really rub it in.
The RPI hit +0.3% in the 12 months to November compared to -0.8% in October. That 1.1% rise in one month was the biggest in 20 years and was mainly thanks to petrol prices. The figure in September was -1.4%, which means a 0.9% cut in rents from April under the RPI plus 0.5% formula.
The UK Statistics Authority is also about to implement a change to the treatment of mortgage interest payments within the RPI. As I read it, if it had it been in force two months ago rents would not have to fall in April and if it been in place in September 2008 rents would have risen even more this year.
Under a proposal that is out for consultation for introduction in March 2010, the RPI will use the average effective rate (AER) to calculate mortgage interest payments rather than the standard variable rate (SVR).
The idea is to reflect better the actual rate that borrowers are paying and in most years would not make much difference to the overall RPI rate. However, the gap between the two has been growing ever since interest rates started falling in late 2008 (presumably because the banks are charging a higher margin on their loans).
The SVR-based RPI fell to -1.6% in the summer - but an AER-based RPI would not have gone below -0.5% and not triggered a rent cut next April. Similarly, AER-based RPI would have been higher in September 2008, triggering a bigger rent rise last April.
Housing associations may already have moved on and be busily looking over the loopholes flagged up by the Tenant Services Authority. However, it’s yet another illustration of the absurdity of setting rents according to a formula that is so heavily influenced by the one thing tenants do not pay - mortgages.
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