Proposals for incorporating owner occupiers’ housing costs into the CPI Derek Bird, Head of Prices Division, ONS

2 Aim Explain the options for incorporating owner occupiers’ housing costs into the CPI Provide background and context for the current position Get users’ views before implementation

3 A quick point on terminology OOH stands for owner occupiers’ housing costs CPIH stands for ‘a new additional measure of consumer prices incorporating owner occupiers’ housing costs’

Background (Context)

5 Owner occupiers’ housing costs Stamp Duty Major repairs and maintenance Dwellings insurance Surveyors’ fees Estate agents’ fees Home buyers’ surveys House prices Mortgage payments

6 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

7 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)

9 History (1) - RPI equivalent rents was introduced to the RPI as a measure of OOH costs RPIAC recommended that OOH costs should be represented in the index by mortgage interest payments, instead of equivalent rent 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.

10 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 (imputations are not generally acceptable in the HICP framework) Methods have been in development since Eurostat is likely to require a stand-alone OOH net acquisitions index from Q3 2014

11 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)

13 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 - OOH14 OOH Net Acquisitions Composition (2012 data) ComponentDescription of Price DataSource of Expenditure Weight House Prices (excluding land)DCLG (ONS from April 2012) HPI Index Gross Fixed Capital Formation (GFCF) Major Repairs & RenovationsDeveloped using separate materials and services indices Household Final Consumption (HHFCE) & GFCF Transfer CostsItem indices from RPIHHFCE Stamp DutyDuty 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)

16 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 on the private market?’

Rental Equivalence – Summary of Data Module 5 - OOH17 OOH Rental Equivalence Composition (2012 data) ComponentDescription of Price Data Source of Expenditure Weight Rental PricesCPI 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 19

Comparison of the data – the weights 20

Comparison of the data – the weights Proportion of OOH of total CPIH YearOOH (RE) %OOH (NA) %

Next Steps

Timetable to implementation 31 August Public Consultation concludes 13 September CPAC’s recommendation on method to be implemented 27 September 2012 UK Statistisc Authority meeting Authority considers recommendation March 2013 Implementation 23