Owner-occupied Housing in the New Zealand Consumers Price Index

EMG Conference 13 – 15 December 2006

Daniel GriffithsStatistics New Zealand

What we will cover• Background to house prices• Recent initiatives• Current house price measures• Conceptual approaches to owner-occupied housing in

a CPI• New Zealand treatment of owner-occupied housing• National Accounts framework for owner-occupied

housing• A unifying framework – Real Disposable Income

measures(?)

Introduction

EMG Conference 13 – 15 December 2006

Why house prices?

Owner-occupied housing:

• Housing as a consumption good

• Housing as an investment

• Composite of consumption and investment

House Prices

EMG Conference 13 – 15 December 2006

Reserve Bank of New Zealand workshop:

“Housing, Savings, and the Household Balance Sheet”

• Investigation into Saving v Savings

• Household wealth and asset prices

Recent work in New Zealand

EMG Conference 13 – 15 December 2006

SD = IT + INT – CFK – ΔB – CT

The Saving Identity

EMG Conference 13 – 15 December 2006

What is currently available

• Quotable Value New Zealand

• Real Estate Institute of New Zealand

• Statistics New Zealand – Consumers Price Index

What do users want in a house price measure?

Current House Price Measures

EMG Conference 13 – 15 December 2006

What is currently produced:

• Average sale price

• Quarterly House Price Index

• Although, some issues with the measures...

Quotable Value New Zealand

EMG Conference 13 – 15 December 2006

What is currently produced:

• Median sale price for houses and sections

• Median days to sell

• Sales volumes

• Regional breakdowns

Real Estate Institute of New Zealand

EMG Conference 13 – 15 December 2006

Three main conceptual approaches to the measurement of owner-occupied housing in a Consumers Price Index

• Uses

• Payments

• Acquisitions

Conceptual approaches to CPIs

EMG Conference 13 – 15 December 2006

Best suited as a measure of:

Cost of Living

• Measured via the 'user cost' or 'rental equivalence' methods

Uses

EMG Conference 13 – 15 December 2006

Measure the flow of services from housing

• Cost of shelter consumed by households

• Reduces to nominal interest rates and depreciation

• Also, appreciation (although, negative user cost?!)

• However, often seen as a 'notional' measure

User Cost method

EMG Conference 13 – 15 December 2006

Imputes the value of the flow of services via the market rental price for housing:

• Owner-occupiers as unincorporated dwellings(cf National Accounts treatment)

• Estimated rental of the owner-occupied dwelling

• However, can be difficulties with govt intervention; • composition of rental + owner-occupied housing

Rental Equivalence method

EMG Conference 13 – 15 December 2006

Best suited as a measure of:

Changes in purchasing power

• Appropriate for income adjustment

• Measures actual monetary outlays on consumer goods and services

• Owner-occupied housing is actual payments

Payments

EMG Conference 13 – 15 December 2006

Can be estimated two ways:

• Simple revaluation method

• Debt profile method

Treatment of Mortgage Interest

EMG Conference 13 – 15 December 2006

Estimates:

movement in house prices

compounded with movements in interest rates

Simple revaluation method

EMG Conference 13 – 15 December 2006

Estimates:

Opportunity cost of deferring purchase of dwelling an additional year

Quality is seen as the ability of the loan to service the purchase of the same quality of housing as in the base period (rather, profile of mortgages as exists in the base period.)

Debt Profile method

EMG Conference 13 – 15 December 2006

Best suited as a measure of:

Consumer Inflation

• Acquisition of consumer goods and services in the base period

• Used by the RBNZ in monetary policy setting

• Owner-occupied housing – net additions to the housing stock, within sector 'nets out'

Acquisitions

EMG Conference 13 – 15 December 2006

Purchase of New Housing

• Constant quality price index

• the acquisitions approach

• Sample and price indicator design

CPI produced by Statistics NZ

EMG Conference 13 – 15 December 2006

Treatment of owner-occupied dwellings•Owner-occupiers as unincorporated ent.

Household Income and Outlay Account•Gross output from owner-occupying

•Rental equivalence

National Accounts Framework

EMG Conference 13 – 15 December 2006

Real disposable income measure:

Some measure of income

Some measure of expenditure

Previously published by Statistics NZ

Real Disposable Income measures

EMG Conference 13 – 15 December 2006

• Real Disposable Income Index (RDI)

• Real Wage Rate Index RWRI

• Discontinued because:•population coverage•Definition of income•Use of LCI•Use of CPI•Misuse and misunderstanding

Previously published RDI

EMG Conference 13 – 15 December 2006

1997 Revision Advisory Committee to the CPI (RAC)•Removal of mortgage interest in headline CPI

1998 Advisory Committee on Economic Statistics

and 2004 RAC

Discussion of RDI measures

EMG Conference 13 – 15 December 2006

Household Income and Outlay Account with a choice of CPI (uses approach for consistency?)

or

Model of Consumer Utility

Possible frameworks

EMG Conference 13 – 15 December 2006

• Require greater coherence in user needs• Are existing house price index adequate?• What are the other emerging needs?• Real disposable income measure?• House prices and income measures

• Your comments...

Where to from here?

EMG Conference 13 – 15 December 2006