1. United Nations Economic Commission for Europe Statistical Division UNECE Workshop on Consumer Price Indices Istanbul, Turkey,10-13 October 2011 Session 8: Owner Occupied Housing – conceptual issues Presentation by Carsten Boldsen, UNECE

2. 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

3. 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

4. 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

5. 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

6. 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

7. UNECE Statistical Division Slide 7 1. The concept of owner occupied houses Coverage according to COICOP 04Housing, water, electricity, gas and other fuels 04.1Actual rentals for housing 04.2Imputed rentals for housing 04.3Maintenance and repair of the dwelling 04.4Water supply, miscellaneous services 04.5Electricity, gas and other fuels

8. UNECE Statistical Division Slide 8 OOH approaches: Use approach: - Rental equivalence - User cost Net acquisition approach Payments approach

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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)

16. 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!

17. 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!)

18. 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

19. 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

20. 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

21. UNECE Statistical Division Slide 21 6. Conclusion The CPI Manual recommends that OOH should be included in the CPI Evaluate data sources and assess the importance and relevance of OOH for the CPI Decide if and how OOH could be included in the CPI