Measuring the price of housing consumption for owners in the CPI

Abstract:\nMeasuring change in the price of housing is an important and notoriously difficult task for national\nstatistical agencies. Different approaches have been attempted, but suffer from known weaknesses.\nThis article suggests dividing housing outlays into consumption and saving. The changes in prices of\nthe consumption component are governed primarily by the purchasing price and the interest rate,\nand lead us to the construction of a consumption cost index. We show that over the lifespan of the\nmortgage, under some general assumptions, the price changes most relevant for inflation\nmeasurement can be obtained from a housing price index. The main challenge lies in computing\nweights for the housing consumption index. We demonstrate how this can be done in practice. An\nempirical example using data from Norway shows that over the 12-month period from June 2003 to\nJune 2004 the official inflation was measured at 1.3%. This did not properly account for a 10.2%\nincrease in house prices. The methodology proposed in this paper estimates the 12-month inflation\nat 3.4%.\nKeywords: asset price inflation, consumer price index, consumption cost, housing prices, inflation\nmeasurement, mortgage, rental equivalence, user cost