Simple User Cost and Rentals

1. Simple User Cost and Rentals Rósmundur Guðnason, Statistics Iceland 8th meeting of The International Working Group on Price Indices (The Ottawa Group), Helsinki, Finland, 23-25 August 2004

2. Market price approach • Using market price change when measuring OOH • Simple user cost, market price change, prices of all properties sold, old and new • Rental equivalence, using market rent to change prices of OOH • Net aqusition, market prices of new house or all • Similar independent of the method used for weights estimation • Market prices, very important for OOH

3. Simple user cost • Simple user cost: • (real interest+depreciation)Xproperty value • Calculated as an annuity, equal payments • The annuity, • covers both depreciation and interest • Both calculated from the same property value base • Price adjusted with house price index

4. Real interest rates, definition • Nominal rate, quality adjustment for inflation needed. • Fishers identity; Nominal interest=Real interest rate X Inflation (CPI). • Real rate=Nominal rate/Inflation (CPI), the quality adjustment. • Iceland, long time real interest rate are preset, indexed with the CPI.

5. Real interest rate, calculation • Long term real interest rates. • Return on investment over the lifetime of the durable. • Capital gain measured by the real interest rate. • The average real interest rate combines. • Own equity, fixed real interest rate. • Mortage real interst rate, variable rate. • Nearly 2/3 of the rates fixed. • Result the opportunity cost over the lifetime of the durable.

6. Real interest rate, estimation • Weight share estimated mainly from sales contracts. • Own equity rate. • Fixed ower the durables life. • The same rate of return as pensions funds, 3%. • Other long term rates. • Variable over the durables life. • Estimated same as the average real interest for mortages. • The other real interest rates lie in the range of 5 to 9%. • August 2004, five year moving average.

7. Real interest rate, results • The average real interest rate. • Approximately 4 per cent since 1992. • Relatively stable over the period. • The interest rate, direct influence on the annuity. • Changes in the real intrest rate, influence on the property sale cash price. • Result, user cost unchanged or lower.

8. Depreciation • Estimated, lifetime of the property, division after age on the stock. • House depreciation rate, 1.5 per cent, 1/1,5=67 year • Land no depreciation. • Average rate for both, 1.25 per cent, 1/1,25=80 year. • Inverse geometric. • Low in the beginning, increases with age. • Durable depreciates fully, unlike geometric depreciation. • Similar to one hoss say, but depreciates over the lifetime.

9. Summary • The most important aspect of OOH question is the use of market prices Two main methods for weight estimation • Simple user cost method uses a real interest rate approximately fixed and depreciation for deciding the expenditure share • The price change of properties is measured by a constant quality price index for all properties sold