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Accounting for housing in a CPI

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  • W. Erwin Diewert
  • Alice O. Nakamura

Abstract

In this paper, we take stock of how statistical agencies in different nations are currently accounting for housing in their consumer price indexes (CPIs). The rental equivalence and user cost approaches have been favourites of economists. Both can be derived from the fundamental equation of capital theory. Concerns about these approaches are taken up. We go on to argue that an opportunity cost approach is the correct theoretical framework for accounting for owner-occupied housing (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. ; We call attention to the need for more direct measures of inflation for owner-occupied housing services. In a 2007 paper, Mishkin argues that central banks with supervisory authority can reduce the likelihood of bubbles forming through prudential supervision of the financial system. However, the official mandates of central banks typically focus on managing measured inflation. Barack Obama has pledged to give the Federal Reserve greater oversight of a broader array of financial institutions. We believe that an important addition to this pledge should be to give the BLS, BEA, and Census Bureau the funds and the mandate to aggressively develop improved measures of inflation for owner-occupied housing services. Central banks and national governments have many policy instruments at their disposal that they could use, in the future, to control inflation in housing markets. What they lack are appropriate measures of inflation in the market for owner-occupied housing services. The proposed new opportunity cost measure for accounting for OOH in a CPI will not be simple or cheap to implement. However, the current financial crisis makes it clear that the costs of not having an adequate measure for inflation in the cost of owner-occupied housing services can be far greater.

Suggested Citation

  • W. Erwin Diewert & Alice O. Nakamura, 2009. "Accounting for housing in a CPI," Working Papers 09-4, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:09-4
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    References listed on IDEAS

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    Cited by:

    1. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    2. 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.
    3. 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.
    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. 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.
    6. Diewert, Erwin & Fixler, Dennis & Zieschang, Kimberly, 2012. "Problems with the Measurement of Banking Services in a National Accounting Framework," Economics working papers erwin_diewert-2012-14, Vancouver School of Economics, revised 04 Apr 2012.
    7. Hill, Robert J. & Syed, Iqbal A., 2016. "Hedonic price–rent ratios, user cost, and departures from equilibrium in the housing market," Regional Science and Urban Economics, Elsevier, vol. 56(C), pages 60-72.
    8. 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.
    9. 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.
    10. 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.
    11. Braga, Breno & Lerman, Robert I., 2019. "Accounting for homeownership in estimating real income growth," Economics Letters, Elsevier, vol. 174(C), pages 9-12.
    12. 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.
    13. 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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    More about this item

    Keywords

    Durable goods; Consumer; Consumer price indexes; Cost of living adjustments; Housing;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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