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Accounting for Housing in a CPI

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  • Diewert, Erwin
  • Nakamura, Alice O.

Abstract

Statistical agencies in different nations usually use the rental equivalence approach to the treatment of housing in their CPIs but a few countries use the user cost approach. The paper argues that an opportunity cost approach is the correct theoretical framework for accounting for OOH in a CPI. This approach, first mentioned in a 2006 OECD paper by Diewert, is developed more fully here. We explore the relationship of this new approach to the usual rental equivalency and user cost approaches. The new approach leads to an Owner Occupied Housing Opportunity Cost (OOHOC) index that is a weighted average of the rental and the financial opportunity costs.

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Bibliographic Info

Paper provided by Vancouver School of Economics in its series Economics working papers with number erwin_diewert-2009-19.

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Length: 33 pages
Date of creation: 05 Mar 2009
Date of revision: 12 Mar 2009
Handle: RePEc:ubc:bricol:erwin_diewert-2009-19

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Web page: http://www.economics.ubc.ca/

Related research

Keywords: Durable goods; Consumer Price Index; Cost of Living Index; Owner Occupied Housing; depreciation; hedonic regression models; rental equivalence approac;

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References

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  1. Bajari, Patrick & Benkard, C. Lanier & Krainer, John, 2005. "House prices and consumer welfare," Journal of Urban Economics, Elsevier, vol. 58(3), pages 474-487, November.
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  3. Randal Verbrugge, 2008. "The Puzzling Divergence Of Rents And User Costs, 1980-2004," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(4), pages 671-699, December.
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  11. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255.
  12. Diewert, Erwin, 2002. "Harmonized indexes of consumer prices: their conceptual foundations," Working Paper Series 0130, European Central Bank.
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  15. Theodore M. Crone & Leonard I. Nakamura & Richard P. Voith, 2004. "Hedonic estimates of the cost of housing services: rental and owner-occupied units," Working Papers 04-22, Federal Reserve Bank of Philadelphia.
  16. Robert J. Hill & T. Peter Hill, 2003. "Expectations, Capital Gains, and Income," Economic Inquiry, Western Economic Association International, vol. 41(4), pages 607-619, October.
  17. Carol Corrado & Charles Hulten & Daniel Sichel, 2005. "Measuring Capital and Technology: An Expanded Framework," NBER Chapters, in: Measuring Capital in the New Economy, pages 11-46 National Bureau of Economic Research, Inc.
  18. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  19. Bert M. Balk & W. Erwin Diewert & Alice O. Nakamura, 2009. "Introduction to price and productivity measurement for housing," Working Papers 09-5, Federal Reserve Bank of Philadelphia.
  20. Andrew Bauer & Nicholas Haltom & William Peterman, 2004. "Examining contributions to core consumer inflation measures," Working Paper 2004-7, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Garrido-Yserte, Rubén & Mañas-Alcón, Elena & Gallo-Rivera, Maria Teresa, 2012. "Housing and cost of living: Application to the Spanish regions," Journal of Housing Economics, Elsevier, vol. 21(3), pages 246-255.
  2. Robert J. Hill & Iqbal A. Syed, 2012. "Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market," Graz Economics Papers 2012-08, University of Graz, Department of Economics.
  3. Shimizu, Chihiro & Nishimura, Kiyohiko G. & Watanabe, Tsutomu, 2010. "Residential rents and price rigidity: Micro structure and macro consequences," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 282-299, June.
  4. Heston, Alan & Nakamura, Alice O., 2009. "Questions about the equivalence of market rents and user costs for owner occupied housing," Journal of Housing Economics, Elsevier, vol. 18(3), pages 273-279, September.
  5. Randal Verbrugge & Thesia I. Garner, 2009. "Reconciling User Costs and Rental Equivalence: Evidence from the U.S. Consumer Expenditure Survey," Working Papers 427, U.S. Bureau of Labor Statistics.
  6. W. Erwin Diewert, 2012. "Rejoinder to Gu on "Estimating Capital Input for Measuring Business Sector Multifactor Productivity Growth in Canada"," International Productivity Monitor, Centre for the Study of Living Standards, vol. 24, pages 63-72, Fall.
  7. Erwin Diewert & Dennis Fixler & Kimberly Zieschang, 2012. "Problems with the Measurement of Banking Services in a National Accounting Framework," Discussion Papers 2012-25, School of Economics, The University of New South Wales.
  8. Garner, Thesia I. & Short, Kathleen, 2009. "Accounting for owner-occupied dwelling services: Aggregates and distributions," Journal of Housing Economics, Elsevier, vol. 18(3), pages 233-248, September.
  9. Balk, Bert M. & Diewert, Erwin & Nakamura, Alice O., 2009. "Introduction to Price and Productivity Measurement for Housing," Economics working papers erwin_diewert-2009-18, Vancouver School of Economics, revised 12 Mar 2009.
  10. Philippe Bergevin, 2012. "Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 362, September.
  11. Diewert, W. Erwin & Nakamura, Alice O. & Nakamura, Leonard I., 2009. "The housing bubble and a new approach to accounting for housing in a CPI," Journal of Housing Economics, Elsevier, vol. 18(3), pages 156-171, September.

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