Owner Occupied Housing in the CPI and Its Impact On Monetary Policy During Housing Booms and Busts

Robert J. Hill
University of Graz, Austria; robert.hill@uni-graz.at

Miriam Steurer
University of Graz, Austria; miriam.steurer@uni-graz.at

Sofie R. Waltl
Luxembourg Institute of Socio-Economic Research, Luxembourg & Vienna University of Economics and Business, Austria; sofie.waltl@liser.lu

Abstract

The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. How – and whether – it is included in the Consumer Price Index (CPI) affects inflation expectations, the measured level of real interest rates, and the behavior of governments, central banks and market participants. We show that none of the existing treatments of OOH are fit for purpose. Hence, we propose a new simplified user cost method with better properties. Using a micro-level dataset, we then compare the empirical behavior of eight different treatments of OOH. Our preferred user cost approach pushes up the CPI during housing booms (by 2 percentage points or more). Our findings relate to the following important debates in macroeconomics: the behavior of the Phillips curve in the US during the global financial crisis, and the response of monetary policy to housing booms, secular stagnation, and globalization.

JEL.: C31; C43; E01; E31; E52; R31

Keywords: Measurement of inflation; Owner occupied housing; User cost; Rental equivalence; Quantile regression; Hedonic imputation; Housing booms and busts; Inflation targeting; Leaning against the wind; Phillips curve; Disinflation puzzle; Secular stagnation

Dissemination

Working Paper:  [Graz Economic Papers]

Presentations:  [NBER Conference on International Comparisons of Income, Prices and Production, MIT, Cambridge (MA), May 2016] [OeNB, Vienna, June 2016] [Oxford U, February 2017] [Institute of Fiscal Studies, London, May 2017] [GGDC 25th Anniversary Conference, Groningen, June 2017] [SEM conference at MIT, Cambridge (MA), July 2017][Reserve Bank of Australia, April 2018] [STATEC, Luxembourg, April 2018] [Economics Statistics Centre of Excellence (ESCoE) Conference on Economic Measurement, Bank of England, May 2018] [International Conference on Real Estate Statistics, Eurostat, Luxembourg, February 2019]

Media Coverage: Die Presse (AT), Central Banking (UK)D’Lëtzeburger Land (LU)Lëtzebuerger Journal (LU)