The estimation of the imputed rent for dwellings and its effect on total GDP 1 The method used in the calculation of the gross imputed rent for dwellings

According to SNA93, the services of owner-occupied dwellings (imputed rent) should be included in GDP. The value of these services is calculated on the basis of the market prices or according to the production costs where market prices are not available.

In Croatia, owner-occupancy prevails. As a result of privatization of the housing stock, according to the 2001 Census of Population, 96% of the inhabited dwellings in Croatia are in private ownership, while legal entities own just 4% of dwellings. 2.9% of dwellings are occupied by a tenant with a contract, and 0.9% households are partly rented. Due to this occupancy structure, the

indirect “user cost” method has been applied in the calculation of the value of services of owner- occupied dwellings.

The gross output value of housing services (i.e. gross rent for dwellings) consists of the actual rentals for housing paid by the tenants and the value of housing services of owner-occupied dwellings, that is, imputed rent for housing.

The user-cost method of calculation implies that the imputed dwelling rent is equal to the sum of intermediate consumption and gross value added. The intermediate consumption includes the costs of materials and skilled labour for regular maintenance and repairs, as well as the expenditure for dwelling insurance. The value added consists of the consumption of fixed capital, other (net) taxes on production and net operating surplus.

So far, the gross output value of housing services is calculated for the total dwelling stock without breakdown into owner-occupied dwellings and rented dwellings. The dwelling stock includes only the dwellings for permanent residence, while dwellings for temporary residence (e.g. dwellings for vacation, recreation, seasonally used dwellings) are excluded.

Data from 1991 and 2001 Census of Dwellings are used for calculating the dwelling stock. For the years between the Censuses, data from construction statistics on the number and total area of newly built and demolished dwellings are used. The value of the dwelling stock is estimated based on construction statistics: the average prices for new dwellings include the price of the land, construction price, and other costs. In the estimation of the purchasing value of the dwelling stock the construction cost data have been used. Thus in the valuation of dwelling stock a correction is made to include the quality of the existing dwelling stock. In the period 1991 - 2001, a correction was made to account for dwellings demolished due to the war, which amounts to 3.7 million square metres, or 3.3 per cent of total residential stock.

According to the 1991 Census of Dwellings, the majority of residential buildings were constructed after 1960 (around 70%). Therefore the current value of dwelling stock has been calculated on this basis as 70% of the purchasing value of the dwelling stock.

The consumption of fixed capital (of the dwelling stock), used to estimate the gross rent, represents the decrease in the value of dwelling stock due to usage and deterioration. In Croatia the service life of the dwelling stock is set at 77 years, with annual deprecation rate of 1.3 per cent. Intermediate consumption i.e. costs of minor repairs, are estimated as 1.0 per cent of the dwelling stock value at current prices.

In the majority of EU countries the value of gross imputed rent for dwellings represents around 10 per cent of GDP. According to the methodology used so far, the share of the rent for dwellings in 2002 amounts to 6.5 per cent of the GDP of Croatia. It is obvious that the existing methodology significantly underestimates the value of the rent for dwellings. This will become more evident in the future as overall economic activity increases faster than the rent. By maintaining the existing methodology of rent calculation, the share of residential rent in the GDP would decrease below 6 per cent, which is very small. Table 11 shows the data used to calculate the imputed rent for dwellings.

90 CROATIA

Table 11. Calculation of the imputed rent for dwellings (according to the existing methodology) 1998 – 2002

(million HRK)

Rent for dwellings

(million HRK)

1998 2000 2002

Purchasing value of the dwelling stock 456 483 525 655 588 697

Current value of the dwelling stock 319 538 367 959 412 088

Consumption of fixed capital 5 934 6 834 7 653

Repair and maintenance cost of the of the dwellings 3 195 3 819 4 121

Gross output value (gross rent for dwelling) 9 130 10 653 11 774

Gross domestic product 137 604 152 519 181 231

Share of gross output value f renting dwellings in the GDP (%) 6.6 7.0 6.5

8.2 The Eurostat recommendation for calculation of imputed rent using the user-cost method The European Commission Decision (95/309/EC) clarifies in detail the methods for the calculation of the rent for dwellings. Eurostat recommends that in those countries where the share of rented dwellings on the market is less than 10 per cent of the total number of dwellings, and where there is a large difference between the market rent and other paid rent, the user-cost method can be applied as the alternative in the case of the owner-occupied dwellings, while the stratification method should be applied in the case of rented dwellings.

Using the user-cost method, the gross imputed rent for dwellings is the sum of the following components:

• intermediate consumption; • consumption of fixed capital; • other (net) taxes on production; • net operating surplus.

To estimate the intermediate consumption, the data from the Household Budget Survey should be used. For the estimation of the consumption of fixed capital, the Perpetual Inventory Method is universally accepted; this method should enable separate estimation for owner-occupied dwellings and privately rented dwellings as well as state-owned dwellings. For net operating surplus, Eurostat suggests applying the fixed rate of 2.5 per cent of the net value of the dwelling stock. This estimation should be reviewed every five years.

Finally, the imputed value of owner-occupied housing services should include the valuation of land on which the dwelling is located. The assumption is that the data sources required for the valuation of the land are available, or estimations can be made and reviewed every five years.

On the basis of the available data and following the Eurostat suggestions, an experimental alternative calculation has been made of the dwelling rent value for the period 1998-2002.

For the calculation of the intermediate consumption, the data from the Household Budget Survey was used. Because of the disparity of HSB data over the years, the average of the ratio of intermediate consumption to gross rent was used, that is 11.5 per cent of gross rent. The net

operating surplus was estimated at 2.5 per cent level. Consumption of fixed capital estimation at the level of 1.3 per cent of the dwelling stock purchasing value is considered to be acceptable. Table 12 shows the results of the experimental calculation.

With new alternative value of calculated rent, the share of dwelling rent following the inclusion of non-observed economy in the GDP ranges from 8.8 per cent in 1998 to 8.7 per cent in 2002.

Table 12. The calculation of the gross rent for dwellings

(according to the methodology recommended by Eurostat) 1998-2002

(million HRK)

1998 2000 2002

Intermediate consumption 1 559 1 811 2 019

Consumption of fixed capital 4 065 46 810 5 242

Net operating surplus (2.5 per cent) 7 988 9 199 10 302

Gross dwelling rents 13 612 15 691 17 563

Gross domestic product (official) 137 604 152 519 181 231

Gross domestic product

(adjusted for exhaustiveness adjustments N1-N7) 154 632 170 469 201 333

Share of gross dwelling rents in official GDP (%) 9.9 10.3 9.7

Share of gross dwelling rents in adjusted GDP (%) 8.8 9.2 8.7