National accounts Definition of a service Conceptual & measurement issues

1. Seminar on organization of a statistical survey on house price changes and the calculation of the HICPKiev, 27 – 28 February 2013Guidelines on the calculation of price indices for owner-occupied housing in a consumer price index and as an integral part of the HICPDavid Fenwick National accounts Definition of a service Conceptual & measurement issues Harmonised Consumer Price Index (HICP) Guidelines/Regulations

2. Housing Costs: owner-occupier housing costs and rented accommodation in a consumer price index • Both owner-occupied housing costs & rent should be included in a CPI. • Owner-occupied housing costs.......issues. • Different conceptual approaches – no international consensus. • Choice of method can have numerical impact. • Practical options often limited by lack of data (e.g. house prices). • Rental equivalence an option where owner-occupier housing market not well developed. • Double counting problematic e.g. repairs, depreciation, equivalent rent. • Rental accommodation • Weights – Household Budget Survey • Prices - Rent surveys. • Main difficulties. • Accounting for missing observations. • Updating the sample. • Major home improvements – quality change.

3. Owner-occupier housing costs reasons for including in a CPI • Inclusion of owner-occupier housing costs in a Consumer Price Index. • A legitimate expenditure • Household Final Monetary Consumption Expenditure (SNA) • Improves relevance and representativity of the CPI. • Broadens coverage. • Should enhance cross-country comparisons. • If same methodologies used. • However concerns expressed about. • Impact on the level and volatility of inflation. • Could add to cross-country divergences in inflation rates. • More difficult for inflation targeting. • OOH data are not always available to the same timescale and frequency as the other CPI data. • No international consensus.

4. Owner-occupier housing costs in a CPI: evaluating & choosing between different methodologies • Criteria for deciding which approach to adopt for Owner-Occupier Housing to use. • It must be aligned with user needs and the main purpose of the CPI. • It must be as consistent as possible with the rest of the CPI (conceptual issues). • It must respect international practices. • It should have public acceptance. • It must be practical to implement.

5. Owner-occupier housing costs – different conceptual approaches • Acquisitions approach. • Measures the price of purchasing owner-occupier housing irrespective of how such a purchase is financed. • Acquisitions can be measured on a gross basis or on a net basis. Net basis consistent with treatment of other durables e.g. exclusion of second-hand cars purchased by one household from another. • In principle would cover cost of extensions & conversions. • The payments approach. • Covers the expenditure actually incurred in occupying the house. It involves measuring the interest payments made on loans to purchase the house. • Repayment of capital: considered an investment? • The user cost approach. • Measures the changing cost of using OOH (opportunity cost of capital). • Usually uses rental equivalence (imputed rent).

6. Owner-occupier housing costs – practical options • Choice of approach will depend on data availability and the main purpose of the index. • Acquisitions approach (usually on a net basis): appropriate for an index used for monetary policy. • Treats house purchase like any other purchase. • Doesn’t consider how purchased financed (irrelevant). • Major repairs included in CPI (separate item). • Most appropriate for a general economic indicator. • Payments approach - most (?) appropriate for a Cost-of-Living Index. • Covers mortgage interest & major repairs...........excluding capital repayment? • Data demanding. • User cost approach (consuming the value of shelter) - appropriate for a Cost-of- Living-Index (COLI). • Represented by rental equivalence as measured by an imputed rent.

7. Owner-occupier housing costs – (net) acquisition cost • Advantages. • Closest treatment to most other items in CPI. • Most appropriate for a CPI that is used as a general economic indicator. • Disadvantages. • Not appropriate as a compensation index. • Weight & price indicator do not reflect change in costs (e.g. not affected by interest rate change). • Debate about inclusion of land or not. • Can be regarded as non-depreciating capital asset. • SNA treats dwellings as capital not consumption.

8. Owner-occupier housing costs – payments approach • Advantages. • More consistent with traditional CPI construction as a compensation index (possible advantage?). • Public relates to approach & can understand it. • No imputations. • Reflects changes in house prices & interest rates. • out-of-pocket expenses. • Disadvantages. • May include the controversial “principal” payment portion of payments (i.e. capital) – an investment? • Includes costs but not benefit of price appreciation. • Data intensive.

9. Owner-occupier housing costs – user cost (rental equivalence) • The concept: owner-occupier can be considered as consuming the shelter provided by his house in the same way as a tenant consumes the shelter of his accommodation for which he pays rent. • Advantages: • A good reflection of the user cost associated with owning a house? • The price and weight data for the rental equivalence approach are often easily available. • Good option when owner-occupier market is not well developed. • Disadvantages: • Data intensive. • Rents may not mirror OOH market (main criticism). • UK example – house prices currently static but rents increasing. • May not effectively capture depreciation?

10. Owner-occupier housing costs – user cost (rental equivalence) • Practical advantages for countries where OOH market is less developed and system more informal. • Lack of formal records preclude other methods. • Housing stock consists of self-builds on family land or upgrading of old stock. • Informal financing and transfers of ownership. • Limited turnover, small market. • The price indicator for imputed rents can be derived either from available price series for rents or from experts in the field. • Important to stratify by house-type, location etc so that the rents data can be combined to reflect the overall composition of owner-occupied property. • Beware of double counting e.g. • Where expenditure on repairs, maintenance, local property taxes, water charges etc. are covered in the rent, these should not be included elsewhere in the index. • If the landlord ceases to provide these ancillary items, the CPI must adjust any rent survey information before calculating imputed rent.

11. Owner-occupier housing costs – the HICP • Draft Commission Regulation. • Under discussion in Eurostat’s Price Statistics Working Group. • PSWG01.2012/07 on Eurostat website. • Covers owner-occupied housing in the HICP and a house price index in its own right. • The owner-occupied house price index in the HICP shall be based on “net acquisitions”. • Costs to be covered in the HICP include. • Changes in actual prices paid by consumers for the acquisition of dwellings that are new to the household sector. • As well as changes in other costs related to the ownership & transfer of ownership. • E.g. Major repair & maintenance, insurance. • Expenditure categories which account for at least 1 part per 100 of total owner-occupiers’ housing expenditures to be covered.

12. The owner-occupied house price index in the HICP based on “net acquisitions” • In principle, in the net acquisitions approach land should be excluded. • It is a non-reproducible asset whose availability is fixed no matter how many transactions of dwellings are carried out. • It is a non-depreciating capital asset - investment, not consumption (similar argument used for not including capital repayments under “payment” approach).

13. Owner-occupier housing costs – the HICP • House Price Index in its own right covers. • Covers purchases of new and old dwellings. • Separate indices for new and old dwellings if account for at least 1 part per 100 of total expenditure on new and old. • Owner-occupied House Price Index & House Price Index to be computed quarterly. • For Owner-occupied House Price Index from 2nd quarter 2014 onwards. • For House Price Index from 2nd quarter 2012. • Weights to be sent to Eurostat. • Back-data. Provision of estimated back-series. • For Owner-occupied House Price Index from 1st quarter 2010 • For House Price Index from 1st quarter 2008.

14. Owner-occupier housing costs – in the HICP • Detailed methodology given in the HICP Owner-Occupied Housing draft manual. • Referred to in draft regulation. • Can be downloaded from Eurostat website. • Will be updated as necessary. • To summarise. • Owner-occupied house price index in the HICP covers. • Acquisition of new dwellings including conversions & self-builds. • Includes incidental costs related to the purchase e.g. solictors & registration fees. • Running costs - major repairs, insurance etc associated with house ownership. • Minor repairs already included in the HICP.

15. House Price Index in its own right • Measures the price development of dwellings transacted in the market. • Gross acquisition approach. • Includes new & old dwellings & price of land is included. • Own-account production excluded. • Full transaction price. • Avoid appraisal price to obtain Bank loan, expert evaluations, advertised price or initial offer price. • In practice, variety of data sources leads to deviation from target index. • E.g. Advertisements - newspapers, internet & Estate Agent; valuations – mortgage lenders, local tax office; initial offer price – estate agent, mortgage lender; price actually paid-property registration. • Registration price – should be best but can be unrealistic price to avoid tax; large time-lag.

16. Owner-occupier housing costs – the HICP • Eurostat Manual is not prescriptive on detailed methodology for Owner-occupied House Price Index or House Price Index but does state that target index is a Laspeyres-type annually-chained index.

17. Owner-occupier housing costs – the HICP: UK experience • Recommendation of UK Consumer Prices Advisory Committee in 2012. • Office for National Statistics (ONS) implements the rental equivalence approach to measure owner occupiers’ housing costs in a new additional measure of consumer price inflation (CPIH) introduced from February 2013, published in March 2013. • CPIH should be published alongside the existing measures of consumer price inflation (i.e. CPI and RPI). • Coverage of CPIH to be extended to include council tax, when it is introduced in early 2013. • Not to be applied to the existing CPI (i.e. HICP), since Eurostat has decided that Council Tax should not be included in the HICP. • Strategy for consumer price statistics endorsed by UK Statistics Authority - welcomed a CPIH developed to meet needs of users (a priority for Bank of England & HM Treasury).

18. Owner-occupier housing costs – the HICP: UK experience • Rental equivalence approach should be used. • A better match against the quality criteria for a measure of OOH in CPIH. • Rental equivalence index meets most of the evaluation criteria as set out in the table in • Annex E of paper CPAC (12)14. • Except for the inclusion of imputed prices. • But is a compromise.

24. Guidelines on the calculation of price indices for owner-occupied housing in a consumer price index and as an integral part of the HICP The End