Seminar on organization of a statistical survey on house price changes and the calculation of the HICP Kiev, 27 – 28 February 2013 Guidelines on the calculation of price indices for owner-occupied housing in a consumer price index and as an integral part of the HICP David Fenwick National accounts Definition of a service Conceptual & measurement issues Harmonised Consumer Price Index (HICP) Guidelines/Regulations

Both owner-occupied housing costs & rent should be included in a CPI. – Owner-occupied housing costs issues. Different conceptual approaches – no international consensus. Choice of method can have numerical impact. Practical options often limited by lack of data (e.g. house prices). Rental equivalence an option where owner-occupier housing market not well developed. Double counting problematic e.g. repairs, depreciation, equivalent rent. – Rental accommodation Weights – Household Budget Survey Prices - Rent surveys. Main difficulties. – Accounting for missing observations. – Updating the sample. – Major home improvements – quality change. 2 Housing Costs: owner-occupier housing costs and rented accommodation in a consumer price index

Inclusion of owner-occupier housing costs in a Consumer Price Index. – A legitimate expenditure Household Final Monetary Consumption Expenditure (SNA) – Improves relevance and representativity of the CPI. Broadens coverage. – Should enhance cross-country comparisons. If same methodologies used. However concerns expressed about. – Impact on the level and volatility of inflation. – Could add to cross-country divergences in inflation rates. » More difficult for inflation targeting. – OOH data are not always available to the same timescale and frequency as the other CPI data. – No international consensus. 3 Owner-occupier housing costs reasons for including in a CPI

Criteria for deciding which approach to adopt for Owner- Occupier Housing to use. – It must be aligned with user needs and the main purpose of the CPI. – It must be as consistent as possible with the rest of the CPI (conceptual issues). – It must respect international practices. – It should have public acceptance. – It must be practical to implement. 4 Owner-occupier housing costs in a CPI: evaluating & choosing between different methodologies

Acquisitions approach. – Measures the price of purchasing owner-occupier housing irrespective of how such a purchase is financed. – Acquisitions can be measured on a gross basis or on a net basis. Net basis consistent with treatment of other durables e.g. exclusion of second-hand cars purchased by one household from another. – In principle would cover cost of extensions & conversions. The payments approach. – Covers the expenditure actually incurred in occupying the house. It involves measuring the interest payments made on loans to purchase the house. – Repayment of capital: considered an investment? The user cost approach. – Measures the changing cost of using OOH (opportunity cost of capital). – Usually uses rental equivalence (imputed rent). 5 Owner-occupier housing costs – different conceptual approaches

Choice of approach will depend on data availability and the main purpose of the index. – Acquisitions approach (usually on a net basis): appropriate for an index used for monetary policy. Treats house purchase like any other purchase. Doesn’t consider how purchased financed (irrelevant). Major repairs included in CPI (separate item). Most appropriate for a general economic indicator. – Payments approach - most (?) appropriate for a Cost-of-Living Index. Covers mortgage interest & major repairs excluding capital repayment? Data demanding. – User cost approach (consuming the value of shelter) - appropriate for a Cost-of- Living-Index (COLI). Represented by rental equivalence as measured by an imputed rent. 6 Owner-occupier housing costs – practical options

Advantages. – Closest treatment to most other items in CPI. – Most appropriate for a CPI that is used as a general economic indicator. Disadvantages. – Not appropriate as a compensation index. Weight & price indicator do not reflect change in costs (e.g. not affected by interest rate change). – Debate about inclusion of land or not. Can be regarded as non-depreciating capital asset. SNA treats dwellings as capital not consumption. 7 Owner-occupier housing costs – (net) acquisition cost

Advantages. – More consistent with traditional CPI construction as a compensation index (possible advantage?). – Public relates to approach & can understand it. – No imputations. – Reflects changes in house prices & interest rates. – out-of-pocket expenses. Disadvantages. – May include the controversial “principal” payment portion of payments (i.e. capital) – an investment? – Includes costs but not benefit of price appreciation. – Data intensive. 8 Owner-occupier housing costs – payments approach

The concept: owner-occupier can be considered as consuming the shelter provided by his house in the same way as a tenant consumes the shelter of his accommodation for which he pays rent. – Advantages: A good reflection of the user cost associated with owning a house? The price and weight data for the rental equivalence approach are often easily available. Good option when owner-occupier market is not well developed. – Disadvantages: Data intensive. Rents may not mirror OOH market (main criticism). – UK example – house prices currently static but rents increasing. May not effectively capture depreciation? 9 Owner-occupier housing costs – user cost (rental equivalence)

Practical advantages for countries where OOH market is less developed and system more informal. – Lack of formal records preclude other methods. Housing stock consists of self-builds on family land or upgrading of old stock. Informal financing and transfers of ownership. Limited turnover, small market. – The price indicator for imputed rents can be derived either from available price series for rents or from experts in the field. – Important to stratify by house-type, location etc so that the rents data can be combined to reflect the overall composition of owner-occupied property. – Beware of double counting e.g. Where expenditure on repairs, maintenance, local property taxes, water charges etc. are covered in the rent, these should not be included elsewhere in the index. If the landlord ceases to provide these ancillary items, the CPI must adjust any rent survey information before calculating imputed rent. 10 Owner-occupier housing costs – user cost (rental equivalence)

Owner-occupier housing costs – the HICP Draft Commission Regulation. – Under discussion in Eurostat’s Price Statistics Working Group. – PSWG /07 on Eurostat website. – Covers owner-occupied housing in the HICP and a house price index in its own right. The owner-occupied house price index in the HICP shall be based on “net acquisitions”. Costs to be covered in the HICP include. – Changes in actual prices paid by consumers for the acquisition of dwellings that are new to the household sector. – As well as changes in other costs related to the ownership & transfer of ownership. E.g. Major repair & maintenance, insurance. – Expenditure categories which account for at least 1 part per 100 of total owner-occupiers’ housing expenditures to be covered.

The owner-occupied house price index in the HICP based on “net acquisitions” In principle, in the net acquisitions approach land should be excluded. – It is a non-reproducible asset whose availability is fixed no matter how many transactions of dwellings are carried out. – It is a non-depreciating capital asset - investment, not consumption (similar argument used for not including capital repayments under “payment” approach).

Owner-occupier housing costs – the HICP House Price Index in its own right covers. – Covers purchases of new and old dwellings. Separate indices for new and old dwellings if account for at least 1 part per 100 of total expenditure on new and old. Owner-occupied House Price Index & House Price Index to be computed quarterly. – For Owner-occupied House Price Index from 2 nd quarter 2014 onwards. – For House Price Index from 2 nd quarter Weights to be sent to Eurostat. Back-data. Provision of estimated back-series. – For Owner-occupied House Price Index from 1 st quarter 2010 – For House Price Index from 1st quarter 2008.

Owner-occupier housing costs – in the HICP Detailed methodology given in the HICP Owner-Occupied Housing draft manual. – Referred to in draft regulation. – Can be downloaded from Eurostat website. – Will be updated as necessary. To summarise. – Owner-occupied house price index in the HICP covers. – Acquisition of new dwellings including conversions & self-builds. Includes incidental costs related to the purchase e.g. solictors & registration fees. – Running costs - major repairs, insurance etc associated with house ownership. Minor repairs already included in the HICP.

House Price Index in its own right Measures the price development of dwellings transacted in the market. – Gross acquisition approach. – Includes new & old dwellings & price of land is included. – Own-account production excluded. Full transaction price. – Avoid appraisal price to obtain Bank loan, expert evaluations, advertised price or initial offer price. In practice, variety of data sources leads to deviation from target index. – E.g. Advertisements - newspapers, internet & Estate Agent; valuations – mortgage lenders, local tax office; initial offer price – estate agent, mortgage lender; price actually paid-property registration. – Registration price – should be best but can be unrealistic price to avoid tax; large time-lag.

Owner-occupier housing costs – the HICP Eurostat Manual is not prescriptive on detailed methodology for Owner-occupied House Price Index or House Price Index but does state that target index is a Laspeyres-type annually-chained index.

Owner-occupier housing costs – the HICP: UK experience Recommendation of UK Consumer Prices Advisory Committee in – Office for National Statistics (ONS) implements the rental equivalence approach to measure owner occupiers’ housing costs in a new additional measure of consumer price inflation (CPIH) introduced from February 2013, published in March – CPIH should be published alongside the existing measures of consumer price inflation (i.e. CPI and RPI). – Coverage of CPIH to be extended to include council tax, when it is introduced in early Not to be applied to the existing CPI (i.e. HICP), since Eurostat has decided that Council Tax should not be included in the HICP. Strategy for consumer price statistics endorsed by UK Statistics Authority - welcomed a CPIH developed to meet needs of users (a priority for Bank of England & HM Treasury).

Owner-occupier housing costs – the HICP: UK experience Rental equivalence approach should be used. – A better match against the quality criteria for a measure of OOH in CPIH. – Rental equivalence index meets most of the evaluation criteria as set out in the table in – Annex E of paper CPAC (12)14. – Except for the inclusion of imputed prices. But is a compromise.

Guidelines on the calculation of price indices for owner-occupied housing in a consumer price index and as an integral part of the HICP The End