Owner Occupied Housing (OOH) in the Framework of National Accounts

1. OwnerOccupiedHousing (OOH) in the Framework of National Accounts Francois Lequiller OECD

2. What is OOH? • When one lives in a home, one consumes a « housing service ». • Dwellings are owned by somebody (household, privatecompany, government, specialagency) • In marketeconomies, householdscanowndwellings • Households have two « ways » of housing: • Rent a home from an owner. The housingservice ismeasured by the rent. • Owntheir home and live in it. • OwnerOccupiedHousing serviceis the estimate of the imputedhousing service thathouseholdsowningtheir home and living in itproducefor themselves.

3. Why impute OOH? • GDP = sum of all productions (without double counting). • Housing service is produced, and is thus part of GDP. • National accounts aggregates should be « robust » to differences in « institutional » settings. • The fact that one can own one’s house or not is an institutional setting which should not affect the aggregate production figure. • If OOH was not imputed: • The comparison of the level of GDP between two countries would be affected by a difference in the rate of ownership by households of their houses. • The change in GDP between two periods would be affected by the change in the rate of ownership of households of their own dwellings. • History: OOH has always been imputed in national accounts

4. Comparisons of level of GDP • France = higher rate of householdownership • Germany = lower rate of householdownership

5. Comparisons in time USA

6. Why OOH and not other services? • System of National Accounts excludes own-account production of services, except for OOH (&6.34). Why? • Size of the problem (housing services = 10% of GDP) • Use of GDP data in administrative context. • Proximity of the « non-market » and the « market » situation for housing. • A good estimate can be made.

7. Measurement of inequalities • The imputation of OOH isuseful for statistics on revenue inequalities. • Some (rare) countries tax OOH! • How to compare the situation of a householdwhichdoes not have to payrentwith one which pays a rent? • In half of OECD countries, surveys on householdrevenues include an estimate of « imputedrents ». • The methodisbased on assuming a rental value equivalent to the market value of similardwellings. • Benchmarking micro inequalityindicatorswith macro inequalityindicatorsneeds to: (1) impute OOH, (2) social transfers in kind.

8. Current OOH estimates

9. OOH in the sequence of Householdaccounts • P12: Output fromown final use: 100 • P2: Intermediateconsumption (ordinary maintenance of dwellingtypically not carried out by tenants + net insurance premiums): 10 • B1g: Gross value added: 90 • P51c: Consumption of fixed capital: 50* • B1n: Net value added: 40 • B2g: Gross operating surplus: 90 • B2n: Net operating surplus: 40 IMPORTANT: • OOH is not mixed income (B3). • Operating surplus of households (B2) isexclusivelyHousing services (OOH and leasing services; &7.9) * Parameters: Rent and User costaround 6% of value of capital, Consumption of Fixed capital around 2.3% of value of capital.=> CCF around 50% of housing service.

10. OOH in the sequence of HH accounts • B2g: Gross operating surplus: 90 • B2n: Net operating surplus: 40 • D29: Taxes on production: 5 • D41: Mortgageinterest: 2 • B6g: Gross disposableincome: 83 • B6n: Net disposableincome: 33 • P31: Household final consumptionexpenditure (housing service): 100 • B8g: Gross saving: -17 • Net saving: -67

11. OOH in SNA and legal texts • SNA has recommended inclusion of estimate for OOH in all its versions, including the first one. • All OECD member countries include an estimate of OOH. • OOH also important for PPP calculations (priceapproach/volume approach). • In the EU, because of the use of GNI in budget calculation, stronglegalapproach. • EU Commission Regulation 1722/2005 • Note: « rent » exclude water supply, refuse and sewage collection, electricity and gas, heating and hot water.

12. Methods of estimating OOH • Two major methods: • Method 1: « Rentalequivalence » or « stratification method ». • Value OOH at the estimatedrentalthat a tenant wouldpay for the sameaccomodation. • EU Regulation’spreferredmethod.Described in verydetailedmanner in the Regulation (includingspecial cases). • Howeverthismethod assumes thereis a wide and well-organisedactualrentalmarket. • Method 2: « User Cost »: • OOH using the « non-market » approach, based on costs. • Second best applicable when: (1) the privatelyrenteddwellingsconstitutelessthan 10% of the total dwelling stock by number and thereis a large disparitybetweenprivate and otherpaidrents (by a factor of three). • Widelyimplemented in the EU for accession of East-European countries. • Otherminormethods: self-assessment, fiscal assessment.

13. Rental equivalence method • Methodapplied by BEA in USA: seepresentation by Michael Hayes • SNA &6.117: « the output of rental services produced by owner-occupiersisvalued at the estimatedrentalthat a tenant wouldpay for the sameaccomodation, takingintoaccountfatorssuch as location, neighbourhoodamenities, etc. as well as the size and quality of the dwellingitself. » • Basically: extrapolation of actualrents to owner-occupied situation • Adaptedwhenthereis a wide and wellorganisedrentalmarket and extended information on characteristics of dwellings x rents.

14. Rental equivalence method (ctd.) • Obtain an estimate of rentby stratum of the owneroccupieddwelling stock. • Needsdeep stratification to bereliable. • Need good information on housing stock: rented/ownedwithdetailedcharacteristics. • Use large data sources: • Population and/or Housingcensuses • Rental and Housingsurveys • Household Budget Survey • Administrative sources • Can use econometric techniques (hedonicregression) to test explanationpotentiality of characteristics for rental variance • Generally base yearcalculationextrapolated/interpolated

15. Rental equivalence method (ctd.) • Stratification: factorsaffecting the rentallevel • Size of dwelling • Amenities of dwelling • Type of dwelling • Environmentcharacteristics (urban/rural, transport facilities) • Socio-economicfactors (type of owner) • Use of capital price of dwelling as implicit principal stratification factor is possible. • Delicate issue of usingrents of governmentowneddwellings (implicit subsidies) to estimateprivatelyownedrents.

16. « User cost » method • Methodapplied by CSO in Hungary: seepresentation by Zsuzsanna Boros • Developped by Eurostat for EU accession countries. • Adaptedwhen no sufficientlydeveloppedactualrentalmarket (two strict conditions in Reg 1722). • Inspired by estimation of non-market output. • Output = sum of costs = intermediateconsumption + net taxes on production + gross operating surplus (GOS) • Easyto measure: Intermediateconsumption + net taxes: • More difficult: GOS = consumptionof fixed capital + net operating surplus (return to capital).

17. « User cost » method (ctd.) • Based on the following (simplified) formula: GOS = i(r + d)S • Where: • i = inflation rate • r = rate of return of capital (average effective mortgage rate; default Reg 1722 = 2.5%) • d = rate of depreciation (geometricdepreciationwith no mortalityfunction) • S = Value of stock of dwellings at currentprice. In principleincludes construction + land.

18. Questions and specificadditional issues • Whatis the size of the rentalmarket in Kazakhstan? • Does Kazakhstan use the User costmethod? • What sort of information isavailable on the stock of owneroccupieddwellings ? • Shouldweseparate land and construction? • Shouldweinclude a measure of expected capital gains? • Dwelling services produced by government: are there far frommarketprice? If yes, shouldweintroduce a marketprice? • Dachas: cantheybetakenintoaccount?