IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/09-4.html
   My bibliography  Save this paper

Accounting for housing in a CPI

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2009/wp09-4.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. 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.
    3. Katz, Arnold J, 1983. "Valuing the Services of Consumer Durables," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 29(4), pages 405-427, December.
    4. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
    5. Christensen, Laurits R & Jorgenson, Dale W, 1969. "The Measurement of U.S. Real Capital Input, 1929-1967," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 15(4), pages 293-320, December.
    6. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255.
    7. 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.
    8. Capozza, Dennis R. & Seguin, Paul J., 1996. "Expectations, efficiency, and euphoria in the housing market," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 369-386, June.
    9. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Working Paper Series 652, European Central Bank.
    10. 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.
    11. 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.
    12. D. W. Jorgenson & Z. Griliches, 1967. "The Explanation of Productivity Change," Review of Economic Studies, Oxford University Press, vol. 34(3), pages 249-283.
    13. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
    14. 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.
    15. Dale Jorgenson, 1967. "The Theory of Investment Behavior," NBER Chapters,in: Determinants of Investment Behavior, pages 129-175 National Bureau of Economic Research, Inc.
    16. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-164, March.
    17. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 2004. "Hedonic estimates of the cost of housing services: rental and owner-occupied units," Working Papers 04-22, Federal Reserve Bank of Philadelphia.
    18. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 2010. "Rents Have Been Rising, Not Falling, in the Postwar Period," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 628-642, August.
    19. W. Erwin Diewert, 2002. "Harmonized Indexes of Consumer Prices: Their Conceptual Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 547-637, December.
    20. Andrew Bauer & Nicholas Haltom & William B. Peterman, 2004. "Examining contributions to core consumer inflation measures," FRB Atlanta Working Paper 2004-7, Federal Reserve Bank of Atlanta.
    21. David Genesove, 2003. "The Nominal Rigidity of Apartment Rents," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 844-853, November.
    22. Hulten, Charles R & Wykoff, Frank C, 1996. "Issues in the Measurement of Economic Depreciation: Introductory Remarks," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 10-23, January.
    23. W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters,in: The Measurement of Capital, pages 433-538 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.

    More about this item

    Keywords

    Durable goods; Consumer ; Consumer price indexes ; Cost of living adjustments ; Housing;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:09-4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul). General contact details of provider: http://edirc.repec.org/data/frbphus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.