Proposals for incorporating owner occupiers housing costs into the - - PowerPoint PPT Presentation

Proposals for incorporating owner occupiers’ housing costs into the CPI

Richard Campbell, Head of Prices Development, ONS

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Aim

• Explain the options for incorporating owner
• ccupiers’ housing costs into the CPI
• Provide background and context for the current

position

• Get user input on implementation

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Contents

• Background

– Context – History

• The Methods

– Rental Equivalence – Net Acquisitions – Comparison of the data

• Next Steps

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A quick point on terminology

• OOH stands for owner occupiers’ housing

costs

• CPIH stands for ‘an expanded Consumer

Prices Index incorporating owner

• ccupiers’ housing costs

CPIH = CPI + OOH

Background (Context)

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Some possible examples of owner occupiers’ housing costs Stamp Duty Major repairs and maintenance Dwellings insurance Surveyors’ fees Estate agents’ fees Home buyers’ surveys House prices Mortgage payments

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So why is measuring OOH so difficult? – The Theory

• Housing is a very large purchase
• Houses are a durable good (measure price

at point of acquisition, payment or use)

• Capital investment vs consumption

expenditure

• The purchase of a house is usually

associated with some form of credit (e.g. a mortgage) requiring the repayment of principal and interest over a number of years

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So why is measuring OOH so difficult? – The Practice

• Lack of consensus on how to deal with the

above issues

• Lack of suitable data to measure OOH

costs

Background (History)

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History (1) - RPI

1956 - equivalent rents was introduced to the RPI as a measure of OOH costs 1974 - the RPIAC recommended that OOH costs should be represented in the index by mortgage interest payments, instead of equivalent rent 1986 - RPIAC re-affirmed the 1974 decisions 1994 - RPIAC recommended the introduction of a second component to go alongside mortgage interest payments, a ‘depreciation costs’ component, introduced to represent the ongoing costs homeowners face in maintaining the standard of their properties.

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History(2) - HICP & OOH

• Always the intention to incorporate OOH in

HICP

• Difficulties in agreeing approach meant it

was initially excluded

• Non-market goods and services in

Consumer Price Indices – Peter Hill, 1997 gave impetus (no imputation so net acquisition appropriate option)

• Methods been in development since
• Stand-alone OOH net acquisitions index

from Q3 2014

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History (3) - OOH development with CPAC

• Introduced OOH concepts at first meeting (June 2009)
• Developed understanding with series of papers on

methods and concepts (September 2009 to March 2010)

• Ruled out two methods – Payments and Narrow User

Cost (September 2010)

• Publication of research to date and development

programme in CPAC report to UK Statistics Authority (November 2010)

• Rental Equivalence and Net Acquisitions methods

further developed in line with programme (since November 2010)

Methods (Net Acquisitions)

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Net Acquisitions - Overview

• Net acquisitions aims to measure:

– Changes to the price of a house – Changes in costs associated with buying a house – Changes in costs associated with maintaining a house

• Exclude capital element of house

purchase

Net Acquisitions – Summary of Data

Module 5 - OOH 15

OOH Net Acquisitions Composition (2012 data)

Component Description of Price Data Source of Expenditure Weight (all from National Accounts) House Prices (excluding land) DCLG (ONS from April 2012) HPI Index Gross Fixed Capital Formation (GFCF) Major Repairs & Renovations Developed using separate materials and services indices Household Final Consumption (HHFCE) & GFCF Transfer Costs Item indices from RPI HHFCE Stamp Duty Duty paid in each price band estimated using HPI for house sales GFCF Insurance connected with the Dwelling Structural insurance price index from RPI HHFCE

Methods (Rental Equivalence)

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Rental Equivalence - Overview

• Treats the house as a capital good
• The owner receives a ‘flow of services’ from the

house:

– shelter – security of tenure – ability to alter dwelling

• ‘What would I have to pay if I rented my property
• n the private market?’

Rental Equivalence – Summary of Data

Module 5 - OOH 18

OOH Rental Equivalence Composition (2012 data) Component Description of Price Data Source of Expenditure Weight Rental Prices CPI private rents series – developed using administrative rent data from VOA, Scottish Government, Welsh Government and Northern Ireland Housing Department Imputed rents from National Accounts

Methods (Comparison of the data)

Comparison of the data – the series

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Comparison of the data – the weights

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Next Steps

Timetable to implementation

• April ‘12. Recommendation from CPAC on

preferred method of OOH

• June ‘12. UK Statistics Authority view on
• method. Public Consultation launched
• September ‘12. Final decision on method to

be implemented

• March ‘13. CPI including OOH published

(February ‘13 CPI)

• 2012 ‘13. User engagement

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Questions for group discussion

1) What are the advantages and disadvantages

• f each method (net acquisitions vs rental

equivalence)? 2) What additional information would help clarify the advantages and disadvantages? 3) Are there any other considerations that should be taken into account when assessing

• wner occupiers’ housing costs?

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The End

Thank you for listening Are there any questions?

Richard Campbell richard.campbell@ons.gsi.gov.uk 01633 651536