1. Gérard Vittek Head of section “index of the cost of construction and rent” 26 th May of 2015 Producer price index for construction Methodological guideline

2. 26 th May of 2015 Methodological guideline Objectives 1.Answer to STS package (310: producer price index excluding the price of the land) 2.Analyse of the housing market 1.Producer price index Construction of new residential buildingsConstruction of new residential buildings 2.New home sales price index Série annuelle depuis 1985Série annuelle depuis 1985 3.New and second-hand housing price indices - Base 100 = annual average of year 2010New and second-hand housing price indices - Base 100 = annual average of year 2010 4.Second-hand housing prices indices - Base 100 in the 1st quarter of 2010Second-hand housing prices indices - Base 100 in the 1st quarter of 2010 3.Contract escalation Construction cost indexConstruction cost index

3. 26 th May of 2015 Methodological guideline Finality of an index A price index is a measure of price trends. Such a goal requires to isolate a pure price change, ruling out any effect related to changes in the content of the given product, for instance, in this case, the rising cost of housing resulting from the increase in the rooms surface and from the installation of more sophisticated equipment. In most cases, price indices are developed as follows: the current value of a sample of intangible items is collected, then is related it to how much it was recorded at a reference date. When an article is replaced by a different model, a "quality effect" is estimated, that is to say the impact of this change on the new price. We can thus determine a pure price change, by subtracting the quality effect.

4. 26 th May of 2015 Methodological guideline Finality of a price index for construction The problem in construction is specific because each building is unique. It is not possible to compare prices at different periods of exactly the same construction. This forbids the simple calculation of price based on the mere observation of buildings, and blurs the perception that people can have of the inflation in the construction sector. Indeed, prices discussed here depend on a large number of parameters: configuration of the construction, materials used, installed equipment, site constraints, site and extent of the operation, nature of relationships between stakeholders (developers, house- builders, general contractors, subcontractors, clients), implementation schedule, circumstances of the deal. The computing device must be adapted to these characteristics.

5. 26 th May of 2015 Methodological guideline Cost of construction index : Legal finality A contract of construction is a deal between a buyer and a producer in order to build a construction or a road. When the contract is signed no one is able to know the change of the prices of the inputs until the end of the contract. In general, states defined by the law a possibility contract escalation (during the process of production) or of revision of the prices (before the beginning of the production)

6. 26 th May of 2015 Methodological guideline Types of construction in Ukraine In France, INSEE distinguishes pure individual, grouped individual and collective dwellings. SSSU publishes producer cost index on a wide Distribution of Representative Objects by Building and Structure Types including residential, non–residential. First of all, we need to delimited the field of the producer price index for construction. Its seems reasonable to imagine we need to build several producer price index and to aggregate then by Paashes method or Laspeyres method. If you choose Paashes method, you need to calculate the weights at each calculation. If you choose Laspeyres method, it its more secure to calculate the weights at each year.

7. 7 Analyse of the regional structure

8. 8 How is the distribution of building permits referring to the regional structure? What is good selection of oblast? Are the prices influenced by the regional structure or by the size of the cities? Does a link exist between the quality of the construction (traditional, precast, etc.) and the regional structure or the size of the cities?

9. 26 th May of 2015 Methodological guideline The firms of the construction sector In the case of a producer price index for construction of residential building it is useful to know the different type of firms and the weights of each type of firm in the sector. It can be relevant to concentrate the index on a part of the field if a great part of the construction is done by a small part of the builder. Perhaps, in this sector a producer price index is simple to organise if the houses built are standardised. A part of the construction can be standardised and the other part not.

10. 26 th May of 2015 Methodological guideline The building permit database and the sampling In France, the ministry of Ecology is in charge of the construction sector. A building permit is compulsory before the beginning of the construction. The building permit database distinguishes renovation, addition of room from construction of a new house. A selection of a sample of building permits for the construction of new houses (or flats) structured by region, type of construction is not difficult to realise.

11. 26 th May of 2015 Methodological guideline The databases available Others database are available: Information from Sub-municipal urban data by district: this area offers data from administrative sources or surveys on income and businesses for the IRIS-classification districts in municipalities of over 10,000 inhabitants Statistical price index for construction of new house aloud us to centre prices of construction of a quarter on the second month of the quarter in tacking in account the change of this index between the date of fixation,of the market price and the second month of the quarter. A database give us the information on the city: touristic city in the mountain, touristic city along the sea.

12. 26 th May of 2015 Methodological guideline The survey and its questionnaire In France, the data collection is realise with surveyor who send the questionnaire to the firm which realise the works or to individuals who build a house. The data collection has 2 steps: –to isolate real new construction of houses or of flat and to eliminate renovation, extension, and so on, –to collect prices and characteristics. The database of French ministry of Ecology contains: –Information from building permits database –Information from survey database step 1 (to isolate real new construction of houses or of flat and to eliminate renovation, extension, and so on) –Information from survey database step 2 (to collect prices and characteristics) INSEE Adds –Information from Sub-municipal urban data by district: this area offers data from administrative sources or surveys on income and businesses for the IRIS- classification districts in municipalities of over 10,000 inhabitants.

13. 26 th May of 2015 Methodological guideline The method used With the constant changes in quality, a posteriori decomposition is not possible. 1. The market is homogeneous and the houses are standardised (like cars, or industrials producer price index) and SSSU can build a producer price index for construction similar to the industrial producer price index. 2. The market is heterogeneous and it is not obvious to estimate the quality effect: an hedonic model can solve the problem.

14. 26 th May of 2015 Methodological guideline The calculation of sub-index by type of construction A real estate agent would explain the price of a house in function of: the area The characteristics of the house physical: number of stage, heating, etc; geographical: region, inside a town versus outside a town; amenities perhaps with times dummies If you are not interesting in the level of the price; you will concentrate the study on the change in price between 2 or more quarter. Price change over time is captured in the model using dummy variables for the date. This method is already used by INSEE, especially for the price index for used housing. It ensures that changes in housing quality are taken into consideration. For each type of construction, you must build a model.

15. 26 th May of 2015 Methodological guideline Estimation of a price with characteristics prices methods using time-dummies The logarithm of the price of a building is a function of the logarithm of its space area, physical characteristics Location characteristics The time-dummy A with noise

16. 26 th May of 2015 Methodological guideline Price of a dwelling versus price of a square meter In general, it is easier to model prices in function of area and characteristics than to model prices by square meter in function of characteristics. The reason is that the prices by square meter are less are less dispersed and « small ». This can be the cause of collinearity.

17. 26 th May of 2015 Methodological guideline 17 Detection of outliers A first calculation of the regression is realised to detect outliers The regressions are run on slippery time ranges from 4 to 8 quarters. A null weight is assigned to cases for which the absolute value of the Student residue is less than 2; The principle of the Student test is the following: we want to determine if the expectation value μ of a population of normal distribution and standard deviation σ unknown is equal to a specified value μ 0. To do this, we draw from this population a sample of size n which are averaged and the empirical standard deviation s. Under the null hypothesis, the sampling distribution of the mean is normally distributed also with a standard deviation. The variable: then follows a Student distribution with n-1 degrees of freedom. If t>2 or T<-2 then the coefficient is not 0

18. 26 th May of 2015 Methodological guideline Weights Calculation of the average price of construction by quarter and by type of construction Using the number of construction and the average price of construction by quarter and by type of construction, we obtain the quarterly value of construction by type of construction

19. 26 th May of 2015 Methodological guideline Elementary indices Calculation of quarterly evolution by type of construction Calculation of elementary indices by type of construction Winsorisation of the elementary indices (not compulsory)

20. 26 th May of 2015 Methodological guideline Elementary indices of output price index in construction

21. 26 th May of 2015 Methodological guideline 21 Producer price index for construction: Weighting aggregation Elementary price indices Each model is used to calculate a price index evolution of construction grade (pure individual, grouped individual and collective dwellings) quarterly constant quality from the exponential of the difference between the variable in the last quarter of the regression and the previous quarter. It then calculates an index with a reference 1 in Q1 1992 quarterly measure the evolution of prices of building category i and writes:

22. 26 th May of 2015 Methodological guideline Aggregated Indice

23. 26 th May of 2015 Methodological guideline 23 Producer price index for construction: Weighting aggregation Chaining the previous annual average (weighted) The weights of the Paasche index using the number of units in the quarter under review and the average price of each type of construction to that date. For the three months a year, an average is calculated to serve the "annual recovery" for the calculation of the quarters of the following year. If we denote the i (pure individual, grouped individual and collective dwellings) type of construction, while the average annual price index is calculated as follows :

24. 26 th May of 2015 Methodological guideline 24 Producer price index for construction: Weighting aggregation Theory Paasche ensures consistency in aggregation of aggregated indices from formulas of harmonic means, such as: Which reads as an aggregate evolution obtained detailed harmonic mean weighted annual values ​​ covering developments. Only values ​​ and price indices are used without the use of quantities and average prices (which are unclean because heterogeneous quality).

25. 26 th May of 2015 Methodological guideline Aggregation and chain linking Fixed Laspeyres index The weights of the Laspeyres index using the number of units in the base quarter and the average price of each type of construction to that date. If we denote the i (pure individual, grouped individually and collective dwellings) type of construction, the index is calculated as follows : In order to produce in the future a chain linked Laspeyres index for Producer price index for construction

26. Thank you for your attention! Contact M. Gérard Vittek Tél. : 01 41 17 51 15 email : gerard.vittek@insee.frgerard.vittek@insee.fr Insee 18 bd Adolphe-Pinard 75675 Paris Cedex 14 www.insee.fr Informations statistiques : www.insee.fr / Contacter l’Insee 09 72 72 4000 (coût d’un appel local) du lundi au vendredi de 9h00 à 17h00 Producer price index for construction