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