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Housing and the HICP – it’s all about compromise

This article explores the relationship between housing and the HICP (Harmonized Index of Consumer Prices) and discusses the compromise needed to accurately measure housing costs. It covers topics such as the inclusion and exclusion criteria, the treatment of owner-occupied dwellings, and the expanded HICP.

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Housing and the HICP – it’s all about compromise

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  1. Housing and the HICP –it’s all about compromise • Matt Berger

  2. HFMCE and the HICP • Household Final Monetary Consumption Expenditure (HFMCE) • that part of final consumption expenditure which is incurred: • by households irrespective of nationality or residence status, and • in monetary transactions, and • on the economic territory of the Member State, and • on goods and services that are used for the direct satisfaction of individual needs or wants, and in one or both of the time periods being compared UNECE-ILO 2010 UK ONS Housing in HICP

  3. Inclusions Small repairs and maintenance (typical of tenants) Directly charged financial services Exclusions Dwelling services provided to owner occupiers (imputed rents) Purchases of land Decoration, maintenance, repair (not typical of tenants) Examples of borderline cases UNECE-ILO 2010 UK ONS Housing in HICP

  4. But HFMCE is a link to the ESA … • SNA treats owner occupiers as unincorporated enterprises • SNA treats acquisition of a dwelling as purchase of capital • Dwelling services (shelter, security of tenure) are provided by the unincorporated enterprise to the household • Imputed income appears as operating surplus in the generation of income account • Imputed expenditure appears in the use of income account UNECE-ILO 2010 UK ONS Housing in HICP

  5. Other housing costs in the SNA … • DIY, decoration etc. is secondary production of unincorporated establishment • Materials seen as intermediate consumption • Major renovations seen as GFCF • Dwelling insurance treated as intermediate consumption • Costs incurred as part of acquisition as seen as GFCF • Surveyors, architects, lawyers • Taxes payable on acquisition • Trade and transport costs UNECE-ILO 2010 UK ONS Housing in HICP

  6. Coverage of expanded HICP? • HFMCE expressly excludes • Capital acquisition • Non-monetary expenditures • And so all measures of housing that might reasonably be included in a CPI • Some sort of change needed to include in expended HICP • Break link to national accounts? • Relax exclusion of non-monetary expenditures • Revisit capital/consumption boundary? • Just for housing? • Net Acquisitions!! UNECE-ILO 2010 UK ONS Housing in HICP

  7. Purpose of HICP!!! • Inflation is perceived as monetary phenomenon • Only net acquisitions approaches measure monetary transactions and fulfil this important condition UNECE-ILO 2010 UK ONS Housing in HICP

  8. European pilot study • Net acquisitions • Expanded HICP to include • the cost of ‘new to the household sector’ dwellings (excluding the cost of the land), plus the cost of major repairs, transfer costs, stamp duties and dwellings insurance. • This effectively treats the acquisition of a dwelling together with land as part consumption (the dwelling) and part capital (the land). • This is not news to many of us • And we are not reopening the debate here UNECE-ILO 2010 UK ONS Housing in HICP

  9. Net Acquisitions • Sees purchases of a house as part capital and part consumption • Land as capital or investment • Dwelling structures as consumption • They provide shelter, security of tenure • They deteriorate over time UNECE-ILO 2010 UK ONS Housing in HICP

  10. Ideal measurement of core housing • Price and expenditure measures on dwellings only for underlying weights • Net sector • Measurement issues vary by country and/or region • Discussed elsewhere, by others • Much better too! • But what about other owner occupiers’ housing costs? UNECE-ILO 2010 UK ONS Housing in HICP

  11. SNA and the pilot study • For the pilot study we treat dwelling acquisition as a consumption good • Land is capital • Under the SNA, any expenditure inextricably linked to the acquisition or formation of capital is seen as capital formation • But we are treating only the land as capital formation or acquisition • But why then do we treat all associated costs as being consumption? • Shouldn’t we try to separate these into costs associated with land and costs associated with the dwelling? UNECE-ILO 2010 UK ONS Housing in HICP

  12. Compromise • Easy for some components • “Dwellings insurance” is likely to be dwellings • Likely very difficult for some other components • Stamp duty • Compromise? • aim for dwelling alone, accept dwelling plus land? • Familiar? • Does this have implications elsewhere? • How do we formally describe the scope and coverage of an expanded HICP? • And how does this differ from ESA (SNA)? UNECE-ILO 2010 UK ONS Housing in HICP

  13. Questions? • Thank you UNECE-ILO 2010 UK ONS Housing in HICP

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