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The rental equivalence approach to nonrental housing in the consumer price index. evidence from Spain

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This paper presents new evidence from Spain that challenges the usual objections to the possibility of applying the rental equivalent approach to determine the weight that non-rental housing services should have in the CPI. Data from the EPFs (Encuestas de Presupuestos Familiares) for 1980-81 and 1990-91 permit a satisfactory explanation of market rents in terms of an index of housing quality, two geographical variables and the year of occupancy. These regression results provide a way to impute a rental value to non-rental housing units that takes into account the possible selection bias induced by systematic differences in housing characteristics between the market rental sector and the non-rental stock. On average, such hedonic values are not that different from the self-imputations provided in the EPFs by the occupants of such dwellings. Therefore, the consequences for inflation of using either of the two alternatives to assess the importance of non-rental housing in the CPI system are small. Instead, if non-rental housing services are dropped from the CPI, then it is estimated that the bias in the measurement of inflation during the 1995-2000 period would be 0.35% per year. The lesson is that, given the alternatives, eliminating non-rental housing services from the CPI -as is done at present in Spain and several other European countries- is an unnecessarily crude form of dealing with a difficult problem

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  • Arévalo, Raquel, 2004. "The rental equivalence approach to nonrental housing in the consumer price index. evidence from Spain," UC3M Working papers. Economics we041704, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we041704
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    1. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 1998. "Measuring housing services inflation," Working Papers 98-21, Federal Reserve Bank of Philadelphia.
    2. Richard Arnott, 1997. "Rent Control," Boston College Working Papers in Economics 391., Boston College Department of Economics.
    3. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
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    1. Colm McCarthy, 2007. "Owner-Occupied Housing Costs and Bias in the Irish Consumer Price Index," Working Papers 200707, School of Economics, University College Dublin.
    2. Carlos Felipe Balcázar & Lidia Ceriani & Sergio Olivieri & Marco Ranzani, 2017. "Rent‐Imputation for Welfare Measurement: A Review of Methodologies and Empirical Findings," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(4), pages 881-898, December.
    3. Bellod Redondo, José Francisco, 2009. "El precio de la vivienda y la inflación en España," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(302), pages 379-405, abril-jun.
    4. Barrett, Alan & Kearney, Ide & O'Brien, Martin, 2007. "Quarterly Economic Commentary, Autumn 2007," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20073, march.
    5. Raquel Arévalo Tomé & José María Chamorro Rivas, "undated". "Geographic Heterogeneity in Housing. Evidence from Spain," Studies on the Spanish Economy 203, FEDEA.
    6. McCarthy, Colm, 2007. "Owner-Occupied Housing Costs and Bias in the Consumer Price Index," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2007(3-Autumn), pages 83-88.

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