Presentation by Philip Turnbull “Why Net Acquisitions would be better” RSS official statistics meeting 15 August 2012 ONS consultation on Owner Occupied Housing Costs in the CPI Presentation by Philip Turnbull “Why Net Acquisitions would be better”

OOH in the CPI Derek Bird has explained the background. Martin Weale has given you the MPC and CPAC case for use of the rental equivalent method. I agree that conceptually this is the best proxy for owner occupied housing costs, this is why it is used in the national accounts. However I am far from convinced that is also suitable for the CPI. 15/08/2012 Philip Turnbuull

Three reasons why net acquisitions would be better Uses actual transaction prices. Actual house prices and associated costs are included. There is no imputation (estimation) of prices. There are no other examples of imputation in the CPI. Using such estimated prices (even though based on actual rents) for 12% of CPI items is unacceptable - 1 In 8 of the items in the basket would have no actual transaction price associated with it. 15/08/2012 Philip Turnbuull

Three reasons why net acquisitions would be better Closer to what non government users expect. House prices are what buyers actually face in the market when deciding to buy a house. Net acquisitions also includes maintenance, transfer costs and house insurance - all real and recognised costs of OOH. Private rents do not adjust quickly enough to be a “monthly” proxy for such costs. 15/08/2012 Philip Turnbuull

Three reasons why net acquisitions would be better Consistent with the EU. Eurostat (with ECB support) have agreed to use net acquisitions. The ONS net acquisitions method is fully consistent with EU requirements. The ONS will have to produce a version of the UK HICP using net acquisitions for the EU and for comparisons within the EU. 15/08/2012 Philip Turnbuull

Three CPAC reasons for preferring rental equivalent A measure of consumption not capital. True, but how good is it at measuring monthly changes in OOH? The main capital element of house prices is the land (location). This is excluded from the NA weights (but not the house prices index). Some of the other elements of NA are consumption costs not capital (e.g. house insurance). 15/08/2012 Philip Turnbuull

Three CPAC reasons for preferring rental equivalent Consistent with the national accounts. True, but how important is this for the CPI? CPAC have (in July) agreed to recommend inclusion of Council Tax in the CPI, so clearly consistency with national accounts is not of that much importance. 15/08/2012 Philip Turnbuull

Three CPAC reasons for preferring rental equivalent More suitable for use by MPC. True, but how important is this for the CPI? The government could (and may anyway) ask MPC to continue using the existing CPI without the OOH element. 15/08/2012 Philip Turnbuull

In conclusion NA would be a better measure of OOH in the CPI because: Uses actual prices not imputed prices. Closer to what non-government users expect to see in an OOH. Consistent with the EU. The CPAC arguments for use of RE are valid, but not strong enough to overcome its deficiencies. 15/08/2012 Philip Turnbuull