Table 1 – (continued)
Central banks Rental values Owner-occupied housing
Collection practices Weight Is OOH Valuation Weight
(%) included? methods for (%)
OOH
Malaysia
•
quarterly survey n.a. No – –Mexico
•
samples of rents and cost of 2.52 Yes Rental 11.97residential construction equivalence
•
direct sampling on the households (5,000 monthly)Netherlands
•
yearly mail survey (panel of 6.69 Yes (only Rental 9.133,500 dwellings) national CPI) equivalence
Poland
•
based on actual household 4.54 Yes Rental 11.97expenditures equivalence
Portugal
•
rents are administered 2.02 No – –Russia
•
price survey to households 12.535 No – –and real estate firms
Saudi Arabia – – – – –
Singapore
•
rent survey conducted by 146 Yes Rental –DOS equivalence
•
data obtained from relevant public sector agenciesSouth Africa
•
prices survey done a private- 4.27 Yes User cost 13.94sector research agency (house rent, approach
flat rent and town house rent)
Spain
•
survey (sample of dwellings 2.31 No – –which covers the whole country, selected and updated on the basis of the Labour Force Survey)
Sweden
•
quarterly mail survey to land- 10.75 Yes User cost 16.07lords (rents for apartments). Annual approach
re-sampling
Switzerland
•
quarterly survey of about 18.72 No – –5,000 residences, with an 1/8 of the sample renewed each quarter
Thailand
•
survey of a housing sample 16.746 Yes Rental –divided into six sub-groups and prices equivalence
are obtained every 6 months
United States
•
survey to a sample of 5.83 Yes Rental 23.44households (50,000 landlords and equivalence
tenants)
•
rental values are quality adjusted2 This figure represents the component “Residence”, which contains among others water, electricity and fuels, house construction and decoration materials and house renting. No breakdown is available for the sub-components.
3 OOH is included in actual rent.
4 This figure includes rental values but also water, electricity, gas and fuels.
5 Includes rental values, water, electricity, gas and other fuels.
6 Includes rental values and owner-occupied housing.
a dwelling at the beginning of the period, consume it and sell it at the end of the period. They there-fore tend to measure the costs of using or consuming the housing stock for shelter purposes. These two methods differ nevertheless in their practical implementation. The rental equivalence approach approximates the cost of OOH by estimating the rent that consumers would pay if they had to rent their residence instead of owning it. In principle, the coverage of OOH should be relatively complete
BACKGROUND NOTE AND KEY ISSUES
under this method, though it requires a broad and well-developed rental market, with broadly simi-lar types of dwellings as in the non-rental housing market and which is not subject to strong regu-lation or government controls (e.g. rental price setting and contract conditions). The user cost approach tries to include the most relevant items of the cost of house ownership such as interest payments on mortgages, depreciation, opportunity cost of owning rather than earning income by investing elsewhere, unrealised capital gains, repairs and maintenance, taxes and insurance. While this method covers all relevant costs associated with OOH, it presents some drawbacks. First, imputed opportunity costs are considered to be outside the scope of the CPI. Second, from the per-spective of monetary policy, the inclusion of mortgage interest payments might be problematic.
Indeed, if the central bank decides to increase short-term interest rates to reduce inflation, the pres-ence of mortgage interest rates in the CPI basket might result in an initial increase in measured inflation rates. This effect might be important in countries with a large share of variable-rate mort-gages and with significant indexation mechanisms that could exacerbate the initial shock.
The payment approach measures the outlays actually made during the period under consid-eration regardless of whether the owner-occupied dwellings were delivered (acquired) or con-sumed during this time. It includes funds used for acquiring the dwelling (purchase price, including the price of land) as well as mortgage interest payments and repayments. Similar to the user cost approach, the inclusion of the mortgage interest payments may not be welcome from the perspective of monetary policy.
Finally, the net acquisition approach measures the average price changes of purchased owner-occupied dwellings acquired by households, regardless of whether the dwelling is actu-ally paid for. In that regard, it differs significantly from the payment approach. This approach mainly includes the price of newly constructed properties7, as it covers the transactions between households and other sectors of the economy, and excludes purchases of existing dwellings from other private households (from there the “net” concept). It also includes repairs and maintenance costs, insurance and fees for real estate agents. Under this approach, the coverage is by defini-tion limited, and the movement of this component will reflect to a large extent construcdefini-tion and maintenance costs, in particular when the price of land is excluded. Most CPI compilers, opting for the net acquisition approach, do prefer to exclude the land, as it is often argued the land is not consumed and that it represents an investment. However, it might be rather difficult to exclude the land from house prices, as it requires relatively detailed data on the land prices. That the coverage is rather limited is an important disadvantage of this approach as is the fact that it is difficult to distinguish between the asset/investment component of the purchase of newly con-structed properties and its the consumption component.
Various studies8have shown that these different methods deliver, in general, different results, not only in terms of price evolution but also in terms of weights. In particular, under the net acquisition approach, the weight will be relatively small compared to the other three valuation methods, since it represents the net purchases of the household sector of houses from other insti-tutional sector in the base period. For rental equivalence, on the other hand, weights are in gen-eral taken from the national household budget survey and thus, they are derived from owner-occupied assessment for owner-occupied housing. For the user cost approach, statistical agencies usually impute the weights based on repairs and maintenance, taxes, insurance and mortgage interest rates. Finally, under the payment approach, weights are derived from all the actual payment made in the base period, irrespective of the moment of the purchase.
Therefore, the use of different methods across countries might also weaken cross-country comparisons of CPI measures. It would be useful if more consensus could be achieved on the best or, at least, the most appropriate practice to measure OOH. This would also contribute to improving the credibility of CPIs. Leifer (2006) has argued that the choice of the method for capturing OOH depends on whether the basket of goods is formed by goods that have been
“used”, “acquired” or “paid” in the base period. In particular, if the objective is to measure the cost of living, then the rental equivalence or the user cost approach should be used. If, in contrast, the goal of the CPI is to measure household monetary expenditures, then the (net) acquisition approach should be preferred. It should be recognised, however, that there is cur-rently no consensus on this issue at the international level.
Whether to include OOH in national and, in particular, in the harmonised CPIs of member states is currently being extensively debated in the European Union. Homeownership costs are so far not included in the HICP, which might considerably impair cross-country comparison as
PROCEEDINGS IFC WORKSHOP – SESSION 3
the share of tenants varies significantly among EU countries. In addition, the non-inclusion of OOH in the inflation measure might affect the credibility of the (H)CPI, in particular in countries with a high share of tenants. On the other hand, it has also been argued that the inclusion of OOH in the HICP might impair timeliness, the reliability and frequency of the HICP. In add-ition, concerns have been raised that including OOH might increase the level and volatility of inflation and to some extent, inflation differentials in the euro area. To address this issue, Eurostat is conducting a feasibility study to assess the impact of including OOH in the HICP based on the net acquisition approach, which is seen to be most consistent with the conceptual framework of the HICP (a price index for final household monetary expenditures). The first results of the pilot study are expected to become available in 2008 and, based on these, a deci-sion will be made whether to include OOH in the HICP.
It is unclear how significant the question of OOH is for countries outside the EU. As already indicated, the measurement of OOH in the US CPI has undergone a number of revisions in the past and a rental equivalence approach is currently used to calculate this CPI component. This approach is also used in Japan, Hong Kong, Mexico, Switzerland, The Netherlands and Thailand. In Australia, a net acquisition approach is used. In China, Canada and South Africa, OOH is valued according to a user cost approach. In many other countries such as Argentina, Brazil, Indonesia, and Europe (HICP), the OOH is currently not included in the official CPI.
Given recent and prospective movements in house price indices in many countries, the meas-urement of housing services in the CPI, and OOH in particular, is likely to continue to remain an important issue for CPI compilers as well as monetary policymakers.
Issues for discussion
•
How satisfied are central banks with the quality of the measurement of rental values in the housing component of the CPI?•
What would be the best or most appropriate method to capture OOH? Can a consensus be found on this at all or does it depend on the structure of the housing market or on the CPI con-cept used? Is a particular approach to be preferred from the perspective of monetary policy-makers?•
What are, or would be, the implications of the inclusion of OOH for the level and volatility of CPI measures (i.e. user cost and payment approach)? Does the inclusion of mortgage interest payments in the OOH cause particular problems for monetary policymakers?•
Would a more generalised inclusion of OOH in the CPI of individual countries improve or impair international comparisons of CPI measures?References
Bureau of Labor Statistics (2005a): “Consumer Price Indexes for Rents and Rental Equivalence”, http://
www.bls.gov/cpi/cpifact6.htm, 27 October 2005.
Crone, T.M., Nakamura, L.I. and Voith, R. (2000), Measuring housing services inflation, Journal of Economic and Social Measurement, Vol 26, pp. 153–171.
Diewert, E. (2003): “The Treatment of Owner Occupied Housing and Other Durables in a Consumer Price Index”.
ECB (2006): “Owner Occupied housing in the Harmonised Index of Consumer Prices”.
Eurostat (2001): “Compendium of HICP reference documents”, Luxembourg.
Goodhart, C. (2001): “What Weight Should be Given to Asset Prices in the Measurement of Inflation”, in:
“The Economic Journal”, 111, pp. 335–356.
ILO, IMF, OECD, UNECE, Eurostat and the World Bank (2004): “Consumer price index manual: Theory and practice”, Geneva.
Johannessen R. (2004): “Owner-occupied housing in Norway: Why the rental equivalence approach is preferred”.
Kurz, C. and Hoffmann, J. (2004): “A rental-equivalence approach for owner-occupied housing in West Germany 1985 to 1998”, Deutsche Bundesbank Discussion Paper No 08/2004, Frankfurt am Main.
Leifer, H.-A. (2006): “The inclusion of owner occupied housing in a consumer price index: some simple consideration”, Deutsche Bundesbank.
OECD (2006): “International Comparability of the Consumer Price Index: owner occupied housing”, paper presented at the OECD seminar “Inflation Measures: Too high – Too low – Internationally Comparable?”, Paris, 21–22 June 2005.
Woolford, K. (2005): “Treatment of owner-occupied housing in Australia – concepts and practices”, paper presented at the OECD seminar “Inflation Measures: Too high – Too low – Internationally Comparable?”, Paris, 21–22 June 2005.