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A retail price index including the shadow price of owner occupied housing

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Author Info

  • Laura Blow

    () (Institute for Fiscal Studies)

  • Lars Nesheim

    () (Institute for Fiscal Studies)

Abstract

How do house price changes affect the cost of living? The retail price index in the UK does not directly incorporate house price changes. Instead it uses mortgage interest to capture the cost of owning a home. This is a useful method from many perspectives. However, from a consumer welfare perspective, while mortgage interest does capture the cost of a particular service, it does not capture the cost of housing services. The shadow price of housing captures the welfare cost to a household of changes in housing prices. In this paper we create a new shadow price index using RPI data and the shadow price of housing and investigate how replacing the mortgage interest with the shadow price of housing affects measures of the cost of living.

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File URL: http://cemmap.ifs.org.uk/wps/cwp0309_2.pdf
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Bibliographic Info

Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP03/09.

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Date of creation: Jan 2009
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Handle: RePEc:ifs:cemmap:03/09

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References

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  1. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, 09.
  2. Ian Crawford, 1994. "UK household cost-of-living indices, 1979-92," Fiscal Studies, Institute for Fiscal Studies, vol. 15(4), pages 1-28, January.
  3. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
  4. John Y. Campbell & João F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," NBER Working Papers 11534, National Bureau of Economic Research, Inc.
  5. Ruiz-Castillo, Javier & Arévalo, Raquel, 2006. "On the imputation of rental prices to owner-occupied housing," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4743, Universidad Carlos III de Madrid.
  6. James M. Poterba, 1992. "Taxation and Housing: Old Questions, New Answers," NBER Working Papers 3963, National Bureau of Economic Research, Inc.
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Cited by:
  1. Garner, Thesia I. & Verbrugge, Randal, 2009. "Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey," Journal of Housing Economics, Elsevier, vol. 18(3), pages 172-192, September.

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