Measuring the Price of Housing Consumption for Owners in the CPI
AbstractMeasuring change in the price of housing is an important and notoriously difficult task for national statistical agencies. Different approaches have been attempted, but suffer from known weaknesses. This article suggests dividing housing outlays into consumption and saving. The changes in prices of the consumption component are governed primarily by the purchasing price and the interest rate, and lead us to the construction of a consumption cost index. We show that over the lifespan of the mortgage, under some general assumptions, the price changes most relevant for inflation measurement can be obtained from a housing price index. The main challenge lies in computing weights for the housing consumption index. We demonstrate how this can be done in practice. An empirical example using data from Norway shows that over the 12-month period from June 2003 to June 2004 the official inflation was measured at 1.3%. This did not properly account for a 10.2% increase in house prices. The methodology proposed in this paper estimates the 12-month inflation at 3.4%.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 427.
Date of creation: Jun 2005
Date of revision:
asset price inflation; consumer price index; consumption cost; housing prices; inflation measurement; mortgage; rental equivalence; user cost;
Find related papers by JEL classification:
- D1 - Microeconomics - - Household Behavior
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-16 (All new papers)
- NEP-MAC-2005-10-18 (Macroeconomics)
- NEP-URE-2005-11-01 (Urban & Real Estate Economics)
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