Empirical estimates of the various approaches to measuring

Empirical estimates of the various approaches to measuring the cost of “owner-occupied” shelter in Canada Andy Baldwin - Alice Nakamura - Marc Prud’Homme Prices Division - Statistics Canada and the University of Alberta Presented at the ILO/UNECE conference on CPIs, May 2010 Computational and technical assistance: Serra Erdur Wendy Li

Introduction l Approaches Components Results Conclusion Why ? l l l Different indexes for different purposes l Escalator of wages l Nominal incomes to real income series l Deflator for expenditure series l Indicator of inflation l International comparisons Shelter is an important expenditure l Shelter = 27% l Owned accommodation = 16% Sensitivity of the CPI to the approach used Shelter in the CPI ILO/UNECE 2010 2

Introduction l Approaches Components Results Conclusion Six various measures are presented based on four different concepts l l Statistics Canada’s Official Concept (user cost) Rental equivalence Money outlays (payments approach) Net purchases (acquisitions approach) Shelter in the CPI ILO/UNECE 2010 3

The approaches: description Introduction l Approaches Components Results Conclusion Official concept l l Definition: Measures the price induced changes associated with the cost of owning and using a given stock of owner-occupied dwellings. Includes actual and imputed costs. Advantages: l Robust because it relates to a fixed stock of dwellings. l Covers elements similar to those that a landlord factors in when fixing rents. Shelter in the CPI ILO/UNECE 2010 4

The approaches: description Introduction l Approaches Components Results Conclusion Rental equivalence l l Definition: Imputes changes of market rents to the population of homeowners. Advantages: l Consistent with the national accounts. l Isolates the consumption flow of owneroccupied housing from the savings flow. Shelter in the CPI ILO/UNECE 2010 5

The approaches: description Introduction l Approaches Components Results Conclusion Money outlays (payments approach) l l Definition: Measures price induced changes associated with the consumption related payments of owner-occupied housing. MO 1: Excluding equity payment MO 2: Including equity payment Advantages: l l l Reflects actual costs to homeowners for their shelter. No imputation or notional amounts are involved. Most of the population would identify their own home ownership experiences with this concept. Escalator of money incomes Shelter in the CPI ILO/UNECE 2010 6

The approaches: description Introduction l Approaches Components Results Conclusion Net purchases (acquisitions approach) l l l Definition: Measures changes in market (transaction) prices for owned accommodation (with or without mortgage interest charges). = purchases of new and existing owner-occupied dwellings minus sales of such dwellings “Net” purchases of existing dwellings is insignificant therefore net purchases = new purchases. NP 1: Based on purchases NP 2: Based on down payments and discounted mortgage payments (Alan Blinder, 1980) Advantages: l Preferred measure for monitoring inflation and for monetary policy. Shelter in the CPI ILO/UNECE 2010 7

The approaches: description Introduction Approaches Components Results Conclusion l No owned accommodation l (Not computed in this version) l Definition: Simply exclude homeownership from the CPI. Housing is an purely a financial asset. l Advantages: l Easy solution and compatible with the current HICP and other country practices. Shelter in the CPI ILO/UNECE 2010 8

Table 1. The various components and their weights in % of owned accommodation, 2001 basket. Introduction Approaches Commodity group Components OFFICIAL RE Results Conclusion MONEY OUTLAYS NET PURCHASE EXCLUDING EQUITY PAYMENT Homeowners’ maintenance and repairs Condo charges Property taxes Insurance premiums Mortgage insurance Mortgage interest charges Replacement cost Real estate commissions Legal fees Other shelter services Equivalent rent 9. 6 2. 0 20. 9 5. 1 1. 2 36. 7 19. 5 2. 7 0. 9 1. 4 3. 3 PURCHASES DOWNPAYMENTS AND MORTGAGE PAYMENTS 11. 9 2. 5 26. 0 6. 4 1. 5 45. 6 9. 8 2. 1 21. 4 5. 3 1. 2 37. 7 11. 8 2. 5 25. 6 6. 3 11. 6 2. 5 25. 2 6. 2 3. 4 1. 1 1. 7 6. 0 INCLUDING EQUITY PAYMENT 2. 8 0. 9 1. 4 3. 3 1. 1 1. 7 1. 4 90. 7 Down payments (NP 2) 15. 2 Home purchase (NP 1) 47. 8 Discounted Mortgage payments 31. 9 Net equity = Down payment + principal share of payment - sale of house Shelter in the CPI 3. 3 1. 1 1. 6 17. 4 ILO/UNECE 2010 9

Table 2. Owned accommodation’s share by homeownership concept by %, 2001 basket. * Introduction Approaches Commodity grouping Official Components Rental equivalence Results Money outlays No equity pmt Shelter Allitems Shelter in the CPI Conclusion With equity pmt Net purchase Purchases Down pmt and mgt pmt 58. 6 66. 2 53. 2 58. 0 53. 6 54. 0 15. 3 19. 9 12. 6 14. 9 12. 8 13. 0 ILO/UNECE 2010 10

Results Introduction Approaches Components Results Conclusion Price Index Series for Owned Accommodation (January 2000 = 100) Shelter in the CPI ILO/UNECE 2010 11

Results Introduction Approaches Components Results Conclusion Price Index Series for Shelter using NHPI (January 2000 = 100) Shelter in the CPI ILO/UNECE 2010 12

Results Introduction Approaches Components Results Conclusion Price Index Series for All items using NHPI (January 2000 = 100) Shelter in the CPI ILO/UNECE 2010 13

Table 3. Overall growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. Introduction Approaches Components Results Conclusion Owned accommodation Shelter All-items Official 20. 2 20. 8 17. 1 Rental equivalence 10. 9 15. 3 15. 7 Money outlays 1 16. 1 18. 4 16. 5 Money outlays 2 8. 7 14. 0 15. 4 Net purchases 1 30. 0 26. 6 18. 6 Net purchases 2 23. 3 22. 7 17. 6 Shelter in the CPI ILO/UNECE 2010 14

Table 4. Annual growth rates (%) for the various measures of homeownership. Period: January 2000 to May 2006. Introduction Results Conclusion Owned accommodation Shelter All-items Official 2. 24 2. 89 1. 91 Rental equivalence 1. 43 1. 82 1. 79 Money outlays (1) 1. 77 2. 0 1. 84 Money outlays (2) 1. 03 1. 58 1. 73 Net purchase (1) 3. 30 2. 92 2. 08 Net purchase (2) 2. 31 2. 34 1. 93 Shelter in the CPI Approaches Components ILO/UNECE 2010 15

Concluding remarks Introduction l Approaches Components Results Conclusion The NHPI Shelter in the CPI ILO/UNECE 2010 16

Concluding remarks Introduction l l Approaches Components Results Conclusion The CPI is sensitive to the homeownership approach used No single generally acceptable concept but there is one depending on what you want your CPI to be. Data availability drives the possibility of producing these series. Dwelling prices are volatile and so is an index that includes the current value of a dwelling. Shelter in the CPI ILO/UNECE 2010 17

The end Shelter in the CPI ILO/UNECE 2010 18