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

  • Laura Blow

    ()

    (Institute for Fiscal Studies)

  • Lars Nesheim

    ()

    (Institute for Fiscal Studies)

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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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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  1. John Y. Campbell & Joao F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," Harvard Institute of Economic Research Working Papers 2083, Harvard - Institute of Economic Research.
  2. Antonia Diaz & Maria J. Luengo-Prado, 2006. "On The User Cost And Homeownership," Economics Working Papers we065421, Universidad Carlos III, Departamento de Economía.
  3. Ian Crawford, 1994. "UK household cost-of-living indices, 1979-92," Fiscal Studies, Institute for Fiscal Studies, vol. 15(4), pages 1-28, January.
  4. 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.
  5. James M. Poterba, 1992. "Taxation and Housing: Old Questions, New Answers," NBER Working Papers 3963, National Bureau of Economic Research, Inc.
  6. Raquel Arévalo & Javier Ruiz-Castillo, 2006. "On the Imputation of Rental Prices to Owner-occupied Housing," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 830-861, 06.
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