Alternative treatments of owneroccupied. Keith Woolford Director Prices Research and Development Australian Bureau of Statistics

Transcription

1 Alternative treatments of owneroccupied housing in a CPI Keith Woolford Director Prices Research and Development Australian Bureau of Statistics

2 Introduction ILO Resolution (2003) recognises three alternatives for defining CPI coverage acquisitions use payments Two major variants of the use approach rental equivalence user cost

3 Introduction (continued) Paper provides empirical estimates of the alternative approaches to shed some light on the practical implications Bilateral comparisons across 2 recent years for which household expenditure data are available ( and ) Constructed for only one city, Sydney, because it was the only Australian capital city for which user cost was positive for both these years Even in case of Sydney it was negative in some intervening years

4 Indexes constructed Calculated Laspeyres, Paasche and Fisher indexes for each alternative: acquisitions use (rental equivalence) use (user cost) payments As a benchmark, also calculated an index excluding owner-occupied housing

5 Costs peculiar to owner-occupiers by approach Item House purchase Acquisitions X Use Rental equivalence User cost Payments Property rates and charges Owner-occupier rents X X X X Owner-occupier user costs Mortgage interest charges X X

6 House purchase Rationale for inclusion in acquisitions index houses should not be treated any differently to other durables market exists and is therefore relevant for inflation measurement Houses do differ from other durable goods real estate is a good store of wealth for the long term, most other consumer durables eventually become worthless difference can largely be attributed to land component which does not depreciate and experiences real price increases over time due to limited supply households view their dwellings as a combination of consumption and investment Include only the structure in the price index recognising the dual nature of OOH, the land component has been excluded on the grounds that it represents the investment component Practical consequence is that the expenditure represents the net addition to the stock of OO dwellings (excl land) including alterations and additions and the price measure is based on the prices paid for the construction of a dwelling on the owner s block of land

7 Owner-occupier rents Aim is to value the shelter services consumed by owner-occupiers based on applying the market rents for equivalent houses ( rental equivalence ) this ensures the shelter component of housing is treated symmetrically for rental and owneroccupied dwellings National accounts and HES data have been used to derive the estimates in the paper

8 Owner-occupier user cost Objective of the user-cost approach is to estimate the overall cost incurred by owneroccupiers in producing their shelter services treats own production of shelter services in same way as other own production such as homeproduced meals i.e. values the inputs involved in producing the service Measure in the paper is the net cost incurred in purchasing a house at the start of each year and selling it at the end of that year

9 Owner-occupier user cost (continued) Calculations Mortgage interest plus Opportunity cost plus Depreciation subtract Capital Gain

10 Owner-occupier user cost (continued) Data requirements start of year average house price (including land) value of the structure (to calculate depreciation) through-the-year change in established house prices through-the-year change in construction costs depreciation rate debt/equity ratio at start of year mortgage interest rate (year average) interest rate for alternative use of funds (year average)

11 Owner-occupier user cost (continued) Common for rates of change in established house prices to be higher than inflation so capital gains can exceed interest costs and depreciation which results in a negative price User-cost measure is not useful for either of the major uses of a CPI measuring inflation adjusting incomes or benefits When house prices rise rapidly a CPI with a user-cost measure for housing will rise less rapidly (and vice versa)

12 Mortgage interest charges A payments-based CPI measures changes in those prices that affect the purchasing power of the net money incomes of households mortgage interest payments are a major part of households expenditures and changes in interest rates impact on households purchasing power Payments approach is not suitable as a general measure of inflation increased interest rates aimed at reducing inflation will result in an increase in recorded inflation

13 Impact on expenditures/weights Expend ($) Wt (%) Expend ($) Wt (%) Excl OOH Housing Total Acquisitions Housing Total Rental equivalence Housing Total User cost Housing Total Payments Housing Total

14 Impact on expend/wts (cont) In Highest expenditure and weight for housing given by rental equivalence for OOH ($ & 27.7%) Lowest by user cost ($ & 16.1%) In Highest by user cost ($ & 28.1%) Lowest by payments ($ & 20.7%) Choice of approach can have a large impact on weights and hence relative contribution to total index

15 Housing price indexes ( / ) Laspeyres Paasche Fisher CPI excl o-o housing Acquisitions Rental equiv User cost Payments

16 All items price indexes ( / ) Laspeyres Paasche Fisher CPI excl o-o housing Acquisitions Rental equiv User cost Payments

17 Conclusions Way that housing costs are treated can have a significant impact on the change in the CPI In , the relative weight for housing varied from 12.9% (excluding owner-occupied housing) to 27.7% (rental equivalence), with the user cost weight being 16.1% In , the corresponding weights were 13.3% (excluding owner-occupied housing), 27.6% (rental equivalence), but the user cost weight was the highest at 28.1%

18 Conclusions (continued) The overall CPIs for are broadly similar for all approaches other than for user cost excluding user cost, the range of the Laspeyres CPIs is from (payments) to (acquisitions) the CPI based on user cost was The range of the housing components was much wider user-cost housing was range for others from (CPI excluding owner-occupied housing) to (acquisitions)

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