Owner Occupied Housing: Market Price Approach to User Cost Rósmundur Guðnason, Statistics Iceland Joint UNECE/ILO Meeting on Consumer Price Indicies Geneva, 4-5 December 2003

Market price approach; weights Housing weights in the index can be decided by different methods Housing weights in the index can be decided by different methods simple user cost where the real interest and depreciation is approximately fixedsimple user cost where the real interest and depreciation is approximately fixed rental eqivalence, Nacc data or ask consumers about rentrental eqivalence, Nacc data or ask consumers about rent net aqusition, by capitalizing durablesnet aqusition, by capitalizing durables These are different methods to decide the share of housing expenditures in the index These are different methods to decide the share of housing expenditures in the index

Market price approach; price measurement Using market price change when measuring housing inflation Using market price change when measuring housing inflation Simple user cost, price change in the market prices of all properties sold, old and newSimple user cost, price change in the market prices of all properties sold, old and new Rental equivalence, using market rent to change prices of OOHRental equivalence, using market rent to change prices of OOH Net aqusition, market prices of new housesNet aqusition, market prices of new houses All three similar: independent of the method used in the aggregation of weights All three similar: independent of the method used in the aggregation of weights

Owner Occupied Housing: Simple user cost Simple user cost: (real interest+depreciation)Xproperty value Simple user cost: (real interest+depreciation)Xproperty value Calculated as a present value of an annuity, as repayment for loan Calculated as a present value of an annuity, as repayment for loan The annuity, covering both depreciation and interest, rent is the same over the lifecycle of the durable The annuity, covering both depreciation and interest, rent is the same over the lifecycle of the durable Land Registry calculates the real estate value of a property in harmonised way Land Registry calculates the real estate value of a property in harmonised way Both interest and depreciation calculated from this property value base Both interest and depreciation calculated from this property value base

User Cost: Real interest rate, definition Fishers (1896) identity; Nominal interest=Real interest rate X Inflation (CPI) Fishers (1896) identity; Nominal interest=Real interest rate X Inflation (CPI) Real rate=Nominal rate/Inflation (CPI) Real rate=Nominal rate/Inflation (CPI) Iceland, long time real interest rate are preset, indexed with the CPI Iceland, long time real interest rate are preset, indexed with the CPI

User Cost: Real interest rate, calculation Long term real interest rate Long term real interest rate return on investment over the lifetime of the durablereturn on investment over the lifetime of the durable capital gain measured as the real interest ratecapital gain measured as the real interest rate The average real interest rate combines ex ante The average real interest rate combines ex ante own equity, fixed real interest rateown equity, fixed real interest rate mortage real interst rate, variable ratemortage real interst rate, variable rate result the opportunity cost over the lifetime of the durableresult the opportunity cost over the lifetime of the durable

User Cost: Real interest rate, estimation Weight share estimated mainly from sales contracts Weight share estimated mainly from sales contracts Own equity rate Own equity rate fixed over the durables lifefixed over the durables life estimated with the same rate of return as pensions fundsestimated with the same rate of return as pensions funds the real interest rate is 3 per cent per yearthe real interest rate is 3 per cent per year Other long term rates Other long term rates variable over the durables lifevariable over the durables life estimated same as the average real interest for loans in the sales contractsestimated same as the average real interest for loans in the sales contracts the other real interest rates lie in the range of 5 to 9 per cent per yearthe other real interest rates lie in the range of 5 to 9 per cent per year

User Cost: Real interest rate, results The average real interest rate The average real interest rate approximately 4 per cent since 1992approximately 4 per cent since 1992 stable over the periodstable over the period The interest rate, direct influence on the annuity The interest rate, direct influence on the annuity Changes in the real intrest rate, direct influence on the property sale cash price Changes in the real intrest rate, direct influence on the property sale cash price Result, user cost unchanged or lower Result, user cost unchanged or lower

User Cost: Depreciation Estimated, lifetime of the property, division after age of the stock Estimated, lifetime of the property, division after age of the stock House depreciation rate, 1.5 per cent, 1/ 0,015 = 67 yearHouse depreciation rate, 1.5 per cent, 1/ 0,015 = 67 year Land no depreciationLand no depreciation Calculated as a average rate for both, 1.25 per cent, 1/0,0125 = 80 yearCalculated as a average rate for both, 1.25 per cent, 1/0,0125 = 80 year Depreciation is geometric with following caracterristics Depreciation is geometric with following caracterristics inverse geometric rate, it is low in the beginning, high in the endinverse geometric rate, it is low in the beginning, high in the end the durable depreciates fully, like one hoss shaythe durable depreciates fully, like one hoss shay

House price index: Property prices Sale contracts are collected by the Land Registry Sale contracts are collected by the Land Registry from the Registry of Deedsfrom the Registry of Deeds Standardised, detail aboutStandardised, detail about the property the property form of payment form of payment Sale contracts are used Sale contracts are used Land Registy, real estate value with hedonics used in the calculation of the user costLand Registy, real estate value with hedonics used in the calculation of the user cost Statistics Iceland, price change of properties of the user costStatistics Iceland, price change of properties of the user cost

House price index: Cash price CPI price concept: cash prices CPI price concept: cash prices Method of payment decisive in the case of housing Method of payment decisive in the case of housing Necessary to calculate the present value of the sale contracts Necessary to calculate the present value of the sale contracts Five different forms of payment Five different forms of payment Money, often paid over a year, Housing Bonds, other durables, new Housing Bonds, overtaken loansMoney, often paid over a year, Housing Bonds, other durables, new Housing Bonds, overtaken loans

House price index: The present value of a contract Discounted by the type of payment Discounted by the type of payment Discounting of Housing Bonds weight heavy and over a shorter period of time the nominal price can deviate from the cash price Discounting of Housing Bonds weight heavy and over a shorter period of time the nominal price can deviate from the cash price The effect of change in discounting of Housing Bonds The effect of change in discounting of Housing Bonds lower rate used, higher present value: lower mortage rate; higher house priceslower rate used, higher present value: lower mortage rate; higher house prices higher rate used, lower present value: higher mortage rate; lower house priceshigher rate used, lower present value: higher mortage rate; lower house prices

House price index: Calculation Present value of the property from the sale contracts Present value of the property from the sale contracts Detail of the index Detail of the index Average present value of a sale contracts per square meterAverage present value of a sale contracts per square meter Weight, three years average of sold properties bye size, fixedWeight, three years average of sold properties bye size, fixed Time period; moving three month averageTime period; moving three month average Type of housing; four typesType of housing; four types Size; five groups for each type, kept constant over a longer time period, quality adjustmentSize; five groups for each type, kept constant over a longer time period, quality adjustment Main indices; fourMain indices; four

Summary The most important aspect of OOH question is the use of market prices in the price measurement The most important aspect of OOH question is the use of market prices in the price measurement Three main methods are used for deciding weights Three main methods are used for deciding weights Simple user cost method uses a real interest rate approximately fixed and depreciation for deciding the expenditure share Simple user cost method uses a real interest rate approximately fixed and depreciation for deciding the expenditure share The price change of properties is measured by a constant quality price index for all properties sold The price change of properties is measured by a constant quality price index for all properties sold