1. 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

2. Shelter in the CPIILO/UNECE 20102 Introduction 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 IntroductionApproachesComponentsResultsConclusion

3. Shelter in the CPIILO/UNECE 20103 Introduction 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) IntroductionApproachesComponentsResultsConclusion

4. Shelter in the CPIILO/UNECE 20104 The 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. IntroductionApproachesComponentsResultsConclusion

5. Shelter in the CPIILO/UNECE 20105 The 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. IntroductionApproachesComponentsResultsConclusion

6. Shelter in the CPIILO/UNECE 20106 The 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 IntroductionApproachesComponentsResultsConclusion

7. Shelter in the CPIILO/UNECE 20107 The 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. IntroductionApproachesComponentsResultsConclusion

8. Shelter in the CPIILO/UNECE 20108 The 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. IntroductionApproachesComponentsResultsConclusion

9. Shelter in the CPIILO/UNECE 20109 Table 1. The various components and their weights in % of owned accommodation, 2001 basket. Commodity groupOFFICIALREMONEY OUTLAYSNET PURCHASE EXCLUDING EQUITY PAYMENT INCLUDING EQUITY PAYMENT PURCHASESDOWNPAYMENTS AND MORTGAGE PAYMENTS Homeowners’ maintenance and repairs 9.66.011.99.811.811.6 Condo charges 2.02.52.12.5 Property taxes 20.926.021.425.625.2 Insurance premiums 5.13.36.45.36.36.2 Mortgage insurance 1.21.51.2 Mortgage interest charges 36.745.637.71.4 Replacement cost 19.5 Real estate commissions 2.73.42.83.3 Legal fees 0.91.10.91.1 Other shelter services 1.41.71.41.71.6 Equivalent rent 90. 7 Down payments (NP2) 15.2 Home purchase (NP1) 47.8 Discounted Mortgage payments 31.9 Net equity = Down payment + principal share of payment - sale of house 17.4 IntroductionApproachesComponentsResultsConclusion

10. Shelter in the CPIILO/UNECE 201010 Table 2. Owned accommodation’s share by homeownership concept by %, 2001 basket.* IntroductionApproachesComponentsResultsConclusion Commo- dity grouping OfficialRental equiva- lence Money outlaysNet purchase No equity pmt With equity pmt Purchases Down pmt and mgt pmt Shelter58.666.253.258.053.654.0 All- items 15.319.912.614.912.813.0

11. Shelter in the CPIILO/UNECE 201011 Results Price Index Series for Owned Accommodation (January 2000 = 100) IntroductionApproachesComponentsResultsConclusion

12. Shelter in the CPIILO/UNECE 201012 Results Price Index Series for Shelter using NHPI (January 2000 = 100) IntroductionApproachesComponentsResultsConclusion

13. Shelter in the CPIILO/UNECE 201013 Results Price Index Series for All items using NHPI (January 2000 = 100) IntroductionApproachesComponentsResultsConclusion

14. Shelter in the CPIILO/UNECE 201014 Table 3. Overall growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. IntroductionApproachesComponentsResultsConclusion Owned accommodation ShelterAll-items Official 20.220.817.1 Rental equivalence 10.915.315.7 Money outlays 1 16.118.416.5 Money outlays 2 8.714.015.4 Net purchases 1 30.026.618.6 Net purchases 2 23.322.717.6

15. Shelter in the CPIILO/UNECE 201015 Table 4. Annual growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. Owned accommodation ShelterAll-items Official2.242.891.91 Rental equivalence1.431.821.79 Money outlays (1)1.772.01.84 Money outlays (2)1.031.581.73 Net purchase (1)3.302.922.08 Net purchase (2)2.312.341.93 IntroductionApproachesComponentsResultsConclusion

16. Shelter in the CPIILO/UNECE 201016 The NHPI Concluding remarks IntroductionApproachesComponentsResultsConclusion

17. Shelter in the CPIILO/UNECE 201017 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 remarks IntroductionApproachesComponentsResultsConclusion

18. Shelter in the CPIILO/UNECE 201018 The end