United Nations Economic Commission for EuropeStatistical DivisionUnited Nations Economic Commission for EuropeStatistical Division

UNECE Workshop on Consumer Price IndicesIstanbul, Turkey,10-13 October 2011

Session 8: Owner Occupied Housing – conceptual issues

Presentation by Carsten Boldsen, UNECE

UNECE Statistical Division Slide 2

Overview

1. The concept of owner occupied houses

2. Rental equivalence approach

3. User cost approach

4. Net acquisition approach

5. Payments approach

6. Conclusion

UNECE Statistical Division Slide 3

1. The concept of owner occupied houses

Why are OOH so difficult?

The complex nature of OOH creates problems in identifying scope and prices

Are OOH investments or consumer durables?

OOH involves two activities: The purchase of the house and the actual consumption over time of the service of the house

The OOH market is not always transparent or easy to delineate in practice

Good and timely data may be difficult to obtain

UNECE Statistical Division Slide 4

1. The concept of owner occupied houses

OOH in national accounts

Houses are considered fixed assets, unlike other durables like waching machines, cars etc.

The purchase of OOH is considered an investment and included in gross fixed capital formation

The purchase of the OOH is not included in houshold final consumption expenditure

Extensions and major repairs of OOH are also considered gross fixed capital formation

UNECE Statistical Division Slide 5

1. The concept of owner occupied houses

The ownership of a house provides a service which is actually consumed over time by the owner

The value of the services provided by OOH is included in houshold final consumption expenditure

The value of the OOH should be estimated as the rental value of similar rented houses, if there are suitable and well-organised rental markets.

In absence of suitable rental markets, other methods are suggested in 2008 SNA, chp. 20

UNECE Statistical Division Slide 6

1. The concept of owner occupied houses

Therefore, to be in line with SNA

The purchase of OOH and extensions and major repairs should be excluded from the CPI

The actually consumption of the service of OOH should be included in the CPI valued by its estimated market price

UNECE Statistical Division Slide 7

1. The concept of owner occupied houses

Coverage according to COICOP

04 Housing, water, electricity, gas and other fuels

04.1 Actual rentals for housing

04.2 Imputed rentals for housing

04.3 Maintenance and repair of the dwelling

04.4 Water supply, miscellaneous services

04.5 Electricity, gas and other fuels

UNECE Statistical Division Slide 8

OOH approaches:

Use approach: - Rental equivalence - User cost

Net acquisition approach

Payments approach

UNECE Statistical Division Slide 9

OOH approaches:

Rental equivalence: Denmark, Germany, Netherlands, Norway, USA, Switzerland, Japan

User cost: Finland Sweden, Island, Ireland, UK, Canada

Net aquisition: Australia, New Zealand

Exclusion: Belgium, Greece, France, Italy, Austria, Portugal

UNECE Statistical Division Slide 10

2. Rental equivalence approach

Include the actual consumption of OOH services by the value of imputed rentals for housing (04.2) in the weightings

Price the weight of imputed rentals by the change in rents of comparable rented houses

Requires a rent survey

Difficult in countries with small or un-representative rental markets or because of different market conditions, e.g. the rental market may be subject to rent control

UNECE Statistical Division Slide 11

2. Rental equivalence approach

Estimates of the ”pure” rent (04.2) may be difficult to obtain

Observable prices may include payments also for electricity, gas, refuse collection etc.

How to treat co-operative housing and other arrangements?

Co-operate with the National Accounts section

UNECE Statistical Division Slide 12

3. User cost approach

Attempts to measure the changes in the cost to the owner of using the house

The user costs comprise two elements:

recurring actual costs, such as those for repairs and maintenance, and property taxes

opportunity cost of having money tied up in the dwelling rather than being used for some other purpose

UNECE Statistical Division Slide 13

3. User cost approach

A typical formula for user cost (UC) would be:

UC = rM + iE + D + RC – K

M= Mortgage debt and equity

E = Equity

r = mortgage interest rate

I = rate of return on alternative assets

D = Depreciation,

RC = other recurring costs

K = capital gains

UNECE Statistical Division Slide 14

3. User cost approach

Evaluation of user cost method:

Requires good data sources

The inclusion of interest rates is questioned by some and may give more volatility to the CPI

A simpler version may be implemented, e.g.

UC = rM + D

UNECE Statistical Division Slide 15

4. Net acquisition approach

Treat OOH as other major consumer durables

Include the value of the net acquisiton of OOH in the weighting basis of the CPI

Include the full price of the dwelling in the CPI at the time of aquisition, regardless of when the consumption is taken place.

The actually consumption of the service of OOH should be excluded (as the services of other durables)

UNECE Statistical Division Slide 16

4. Net acquisition approach

OOH net acquisition includes

Self-builders building their own house

Purchase of new house from a building firm or construction works from different building firms.

Purchase of new house from an estate agent or a firm selling new dwellings.

Purchase of an existing house from outside the household sector.

All in net terms: Purchase – sale!

UNECE Statistical Division Slide 17

4. Net acquisition approach

The net acquisition approach – justification

if the primary motivation for acquiring OOH is to obtain shelter and the investment component in the acquisition of the dwelling can be neglected

Based on actual market prices it provides genuine new information to the overall CPI (unlike imputed prices!)

UNECE Statistical Division Slide 18

4. Net acquisition approach

The net acquisition approach – problems

The value of the land component should in principle not be included in the price (land is a non-produced asset and not part of gross fixed capital formation)

Requires good data sources

EU member countries experiences have shown that it is difficult to calculate price indices for net aquisition of OOH

UNECE Statistical Division Slide 19

5. Payments approach

The payments approach aims to cover actual outlays made by the households set of outlays includes:

down payments on purchases houses repayments of mortgage principal; mortgage interest payments; insurance, repair and maintenance of the dwelling; legal and real estate agency Property taxes

UNECE Statistical Division Slide 20

5. Payments approach

Payments approach – evaluation

It is generally agreed that at least some of the elements represent capital transactions that ought to be excluded from a CPI

Not much used in practice

Require good data sources for both prices and weights  

UNECE Statistical Division Slide 21

6. Conclusion

The CPI Manual recommends that OOH should be included in the CPI

Evaluate data sources and assess the importance and relevance of OOH for the CPI

Decide if and how OOH could be included in the CPI