Using house prices to compute the price of housing in the CPI

Abstract

Rental-equivalence is often used in computing price changes of owner-occupied housing in the CPI. We employ an alternative approach, employing interest-adjusted house prices. For Norway 2000-2008 our method yielded a 30% CPI-increase, compared to the official 17%.JEL classification: E3, E5.

The Engel Curve of Owner-Occupied Housing Consumption

“…In addition to this article's method of estimating what an owner foregoes in rent, using data on rentals, one could take the above mentioned method used by Poterba and Sinai (2008) and estimate the value of each owner's house, using data on sales, and relate this to the owner's income. In a variant of this, one employs the interest payments of a new, no-equity purchase of an owner's home as a proxy for latent housing consumption (Beatty, Røed Larsen, and Sommervoll 2010). These approaches are not much different as long as the markets for owners and renters are comparable; a maintained assumption in this article.…”

Is Urban China’s CPI Underreported?

“…With the user cost approach, we use a depreciation rate of 1.9% (50 years service life and residual value 5%). In addition, with both approaches, we try both loan and deposit interest rates since it is not clear which Beatty et al (2010) use.…”

“…They are: the acquisitions approach, the rental equivalent approach, the user cost approach, and the payments approach. In addition, Beatty, Larsen, and Sommervoll (2010) proposed an improved rental equivalent approach, termed "consumption cost approach". Among the five approaches, we adopt the user cost approach and the consumption cost approach, because of certain shortcomings of the other approaches.…”

“…Among the five approaches, we adopt the user cost approach and the consumption cost approach, because of certain shortcomings of the other approaches. As Beatty et al (2010) critiqued, the acquisitions approach ignores the role played by interest rates and the payments approach (based on observed interest payments by households with a mortgage) ignores the role played by households with equity. Meanwhile, the rental equivalent approach would not apply well in China, because the rental market in China (as in many other countries) is not developed during the research period and the rental imputation would have to be based on an unreliable out-of-sample extrapolation.…”

“…When this happens, the overall CPI could decline even when every price is increasing in an economy. Therefore, as some suggest (e.g., Poole et al, 2005;Beatty et al, 2010;Diewert et al, 2009), we adopt this approach without the appreciation of housing prices component. Furthermore, for China we can set the maintenance cost to zero.…”