Owner-occupied Housing in the New Zealand Consumers Price Index EMG Conference 13 – 15 December 2006 Daniel Griffiths Statistics 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 = I T + I NT – 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