Empirical estimates of the various approaches

to measuring the cost of “owner-occupied”

shelter in Canada

Empirical estimates of the various approaches

to measuring the cost of “owner-occupied”

shelter in Canada

Andy Baldwin - Alice Nakamura - Marc Prud’Homme

Prices Division - Statistics Canada

and the University of Alberta

Presented at the ILO/UNECE conference on CPIs, May 2010

Computational and technical

assistance:

Serra Erdur

Wendy Li

Andy Baldwin - Alice Nakamura - Marc Prud’Homme

Prices Division - Statistics Canada

and the University of Alberta

Presented at the ILO/UNECE conference on CPIs, May 2010

Computational and technical

assistance:

Serra Erdur

Wendy Li

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 22

IntroductionIntroduction

Why ? Different indexes for different purposes

Escalator of wages Nominal incomes to real income series Deflator for expenditure series Indicator of inflation International comparisons

Shelter is an important expenditure Shelter = 27% Owned accommodation = 16%

Sensitivity of the CPI to the approach used

Introduction Approaches Components Results Conclusion

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IntroductionIntroduction

Six various measures are presented based on four different concepts Statistics Canada’s Official Concept (user

cost) Rental equivalence Money outlays (payments approach) Net purchases (acquisitions approach)

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 44

The approaches: descriptionThe approaches: description

Official concept Definition: Measures the price induced

changes associated with the cost of owning and using a given stock of owner-occupied dwellings. Includes actual and imputed costs.

Advantages: Robust because it relates to a fixed stock of

dwellings. Covers elements similar to those that a

landlord factors in when fixing rents.

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 55

The approaches: descriptionThe approaches: description

Rental equivalence Definition: Imputes changes of market rents to

the population of homeowners. Advantages:

Consistent with the national accounts. Isolates the consumption flow of owner-

occupied housing from the savings flow.

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 66

The approaches: descriptionThe approaches: description

Money outlays (payments approach) Definition: Measures price induced changes associated with

the consumption related payments of owner-occupied housing.

MO 1: Excluding equity payment MO 2: Including equity payment Advantages:

Reflects actual costs to homeowners for their shelter. No imputation or notional amounts are involved.

Most of the population would identify their own home ownership experiences with this concept.

Escalator of money incomes

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 77

The approaches: descriptionThe approaches: description

Net purchases (acquisitions approach) Definition: Measures changes in market (transaction) prices

for owned accommodation (with or without mortgage interest charges).

= purchases of new and existing owner-occupied dwellings minus sales of such dwellings

“Net” purchases of existing dwellings is insignificant therefore net purchases = new purchases.

NP 1: Based on purchases NP 2: Based on down payments and discounted mortgage

payments (Alan Blinder, 1980) Advantages:

Preferred measure for monitoring inflation and for monetary policy.

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 88

The approaches: descriptionThe approaches: description

No owned accommodation (Not computed in this version)

Definition: Simply exclude homeownership from the CPI. Housing is an purely a financial asset.

Advantages: Easy solution and compatible with the current

HICP and other country practices.

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 99

Table 1. The various components and their weights in % of owned accommodation, 2001 basket.Table 1. The various components and their weights in % of owned accommodation, 2001 basket.

Commodity group OFFICIAL RE MONEY OUTLAYS NET PURCHASEEXCLUDING

EQUITY PAYMENT

INCLUDING EQUITY

PAYMENT

PURCHASES DOWNPAYMENTS AND MORTGAGE PAYMENTS

Homeowners’ maintenance and repairs 9.6 6.0 11.9 9.8 11.8 11.6Condo charges 2.0 2.5 2.1 2.5 2.5Property taxes 20.9 26.0 21.4 25.6 25.2Insurance premiums 5.1 3.3 6.4 5.3 6.3 6.2Mortgage insurance 1.2 1.5 1.2Mortgage interest charges 36.7 45.6 37.7 1.4Replacement cost 19.5Real estate commissions 2.7 3.4 2.8 3.3 3.3Legal fees 0.9 1.1 0.9 1.1 1.1Other shelter services 1.4 1.7 1.4 1.7 1.6Equivalent rent 90.

7Down payments (NP2) 15.2Home purchase (NP1) 47.8Discounted Mortgage payments 31.9Net equity = Down payment + principal share of payment - sale of house 17.4

Introduction Approaches Components Results Conclusion

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Table 2. Owned accommodation’s share by homeownership concept by %, 2001 basket.* Table 2. Owned accommodation’s share by homeownership concept by %, 2001 basket.*

Introduction Approaches Components Results Conclusion

Commo-dity grouping

Official Rental

equiva-lence

Money outlays Net purchase

No equity pmt

With equity pmt

PurchasesDown

pmt and mgt pmt

Shelter 58.6 66.2 53.2 58.0 53.6 54.0

All-items

15.3 19.9 12.6 14.9 12.8 13.0

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 1111

ResultsResults

Price Index Series for Owned Accommodation (January 2000 = 100)Price Index Series for Owned Accommodation (January 2000 = 100)

Introduction Approaches Components Results Conclusion

Shelter in the CPIShelter in the CPI ILO/UNECE 2010ILO/UNECE 2010 1212

ResultsResults

Price Index Series for Shelter using NHPI (January 2000 = 100)

Introduction Approaches Components Results Conclusion

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ResultsResults

Price Index Series for All items using NHPI (January 2000 = 100)

Introduction Approaches Components Results Conclusion

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Table 3. Overall growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. Table 3. Overall growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006.

Introduction Approaches Components Results Conclusion

Owned accommodation

Shelter All-items

Official 20.2 20.8 17.1

Rental equivalence

10.9 15.3 15.7

Money outlays 1 16.1 18.4 16.5

Money outlays 2 8.7 14.0 15.4

Net purchases 1 30.0 26.6 18.6

Net purchases 2 23.3 22.7 17.6

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Table 4. Annual growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. Table 4. Annual growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006.

Owned accommodation

Shelter All-items

Official 2.24 2.89 1.91

Rental equivalence 1.43 1.82 1.79

Money outlays (1) 1.77 2.0 1.84

Money outlays (2) 1.03 1.58 1.73

Net purchase (1) 3.30 2.92 2.08

Net purchase (2) 2.31 2.34 1.93

Introduction Approaches Components Results Conclusion

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The NHPI

Concluding remarksConcluding remarksIntroduction Approaches Components Results Conclusion

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The CPI is sensitive to the homeownership approach used

No single generally acceptable concept but there is one depending on what you want your CPI to be.

Data availability drives the possibility of producing these series.

Dwelling prices are volatile and so is an index that includes the current value of a dwelling.

Concluding remarksConcluding remarksIntroduction Approaches Components Results Conclusion

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The end