1. Owner Occupied Housing (OOH) in the Framework of National Accounts Francois Lequiller OECD

2. What is OOH? When one lives in a home, one consumes a « housing service ». Dwellings are owned by somebody (household, private company, government, special agency) In market economies, households can own dwellings Households have two « ways » of housing: – Rent a home from an owner. The housing service is measured by the rent. – Own their home and live in it. Owner Occupied Housing service is the estimate of the imputed housing service that households owning their home and living in it produce for themselves.

3. Why impute OOH? GDP = sum of all productions (without double counting). Housing service is produced, and is thus part of GDP. National accounts aggregates should be « robust » to differences in « institutional » settings. The fact that one can own one’s house or not is an institutional setting which should not affect the aggregate production figure. If OOH was not imputed: – The comparison of the level of GDP between two countries would be affected by a difference in the rate of ownership by households of their houses. – The change in GDP between two periods would be affected by the change in the rate of ownership of households of their own dwellings. History: OOH has always been imputed in national accounts

4. Comparisons of level of GDP France = higher rate of household ownership Germany = lower rate of household ownership

5. Comparisons in time USA

6. Why OOH and not other services? System of National Accounts excludes own- account production of services, except for OOH (&6.34). Why? – Size of the problem (housing services = 10% of GDP) – Use of GDP data in administrative context. – Proximity of the « non-market » and the « market » situation for housing. – A good estimate can be made.

7. Measurement of inequalities The imputation of OOH is useful for statistics on revenue inequalities. Some (rare) countries tax OOH! How to compare the situation of a household which does not have to pay rent with one which pays a rent? In half of OECD countries, surveys on household revenues include an estimate of « imputed rents ». The method is based on assuming a rental value equivalent to the market value of similar dwellings. Benchmarking micro inequality indicators with macro inequality indicators needs to: (1) impute OOH, (2) social transfers in kind.

8. Current OOH estimates

9. OOH in the sequence of Household accounts P12: Output from own final use: 100 P2: Intermediate consumption (ordinary maintenance of dwelling typically not carried out by tenants + net insurance premiums): 10 B1g: Gross value added: 90 P51c: Consumption of fixed capital: 50* B1n: Net value added: 40 B2g: Gross operating surplus: 90 B2n: Net operating surplus: 40 IMPORTANT: OOH is not mixed income (B3). Operating surplus of households (B2) is exclusively Housing services (OOH and leasing services; &7.9) * Parameters: Rent and User cost around 6% of value of capital, Consumption of Fixed capital around 2.3% of value of capital.=> CCF around 50% of housing service.

10. OOH in the sequence of HH accounts B2g: Gross operating surplus: 90 B2n: Net operating surplus: 40 D29: Taxes on production: 5 D41: Mortgage interest: 2 B6g: Gross disposable income: 83 B6n: Net disposable income: 33 P31: Household final consumption expenditure (housing service): 100 B8g: Gross saving: -17 Net saving: -67

11. OOH in SNA and legal texts SNA has recommended inclusion of estimate for OOH in all its versions, including the first one. All OECD member countries include an estimate of OOH. OOH also important for PPP calculations (price approach/volume approach). In the EU, because of the use of GNI in budget calculation, strong legal approach. EU Commission Regulation 1722/2005 Note: « rent » exclude water supply, refuse and sewage collection, electricity and gas, heating and hot water.

12. Methods of estimating OOH Two major methods: – Method 1: « Rental equivalence » or « stratification method ». Value OOH at the estimated rental that a tenant would pay for the same accomodation. EU Regulation’s preferred method. Described in very detailed manner in the Regulation (including special cases). However this method assumes there is a wide and well-organised actual rental market. – Method 2: « User Cost »: OOH using the « non-market » approach, based on costs. Second best applicable when: (1) the privately rented dwellings constitute less than 10% of the total dwelling stock by number and there is a large disparity between private and other paid rents (by a factor of three). Widely implemented in the EU for accession of East-European countries. – Other minor methods: self-assessment, fiscal assessment.

13. Rental equivalence method Method applied by BEA in USA: see presentation by Michael Hayes SNA &6.117: « the output of rental services produced by owner-occupiers is valued at the estimated rental that a tenant would pay for the same accomodation, taking into account fators such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. » Basically: extrapolation of actual rents to owner- occupied situation Adapted when there is a wide and well organised rental market and extended information on characteristics of dwellings x rents.

14. Rental equivalence method (ctd.) Obtain an estimate of rent by stratum of the owner occupied dwelling stock. Needs deep stratification to be reliable. Need good information on housing stock: rented/owned with detailed characteristics. Use large data sources: – Population and/or Housing censuses – Rental and Housing surveys – Household Budget Survey – Administrative sources Can use econometric techniques (hedonic regression) to test explanation potentiality of characteristics for rental variance Generally base year calculation extrapolated/interpolated

15. Rental equivalence method (ctd.) Stratification: factors affecting the rental level – Size of dwelling – Amenities of dwelling – Type of dwelling – Environment characteristics (urban/rural, transport facilities) – Socio-economic factors (type of owner) – Use of capital price of dwelling as implicit principal stratification factor is possible. – Delicate issue of using rents of government owned dwellings (implicit subsidies) to estimate privately owned rents.

16. « User cost » method Method applied by CSO in Hungary: see presentation by Zsuzsanna Boros Developped by Eurostat for EU accession countries. Adapted when no sufficiently developped actual rental market (two strict conditions in Reg 1722). Inspired by estimation of non-market output. Output = sum of costs = intermediate consumption + net taxes on production + gross operating surplus (GOS) – Easy to measure: Intermediate consumption + net taxes: – More difficult: GOS = consumption of fixed capital + net operating surplus (return to capital).

17. « User cost » method (ctd.) Based on the following (simplified) formula: GOS = i(r + d)S Where: – i = inflation rate – r = rate of return of capital (average effective mortgage rate; default Reg 1722 = 2.5%) – d = rate of depreciation (geometric depreciation with no mortality function) – S = Value of stock of dwellings at current price. In principle includes construction + land.

18. Questions and specific additional issues What is the size of the rental market in Kazakhstan? Does Kazakhstan use the User cost method? What sort of information is available on the stock of owner occupied dwellings ? Should we separate land and construction? Should we include a measure of expected capital gains? Dwelling services produced by government: are there far from market price? If yes, should we introduce a market price? Dachas: can they be taken into account?