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Introducing a new method for deriving rental data in the calculation of Household Final Consumption Expenditure in the National Accounts

Introduction

In the publication of the month 2 estimate of GDP for Q4 2013, published on Wednesday 26 February, ONS will introduce a new method to inflate estimates of Household Final Consumption Expenditure (HHFCE) on actual and imputed rental.  The new method will take into consideration appropriate ‘Housing’ data from the CPIH, the measure of Consumer Price Inflation including owner occupiers' housing costs (OOH).

The alignment of HHFCE on actual and imputed rental with the CPIH will affect nominal HHFCE and the expenditure-based GDP deflator at market prices.

Terminology used

Actual rental covers rent paid to local authorities and private sector landlords for the consumption of both furnished and unfurnished properties. This consumption is a component of HHFCE.

In the national accounts, owner-occupiers are deemed to be unincorporated businesses producing housing services, which they then consume. This consumption is known as imputed rental and is also a component of HHFCE. This approach is known as “rental equivalence”.  Rental equivalence uses the rent paid for an equivalent house as a proxy for the costs faced by an owner occupier. In other words this answers the question “how much would I have to pay in rent to live in a home like mine?” for an owner occupier. 

Intention to introduce new methods at Blue Book 2015

It has long been the stated intention of ONS to utilise Valuation Office Agency (VOA) data in the compilation of current price and chained volume measure HHFCE on actual and imputed rental, COICOPs 04.1 and 04.2 respectively. However, the priority for the UK National Accounts in the delivery of Blue Book 2014 is to achieve legal compliance with revised international guidance manuals; specifically the European System of Accounts (ESA2010) and Balance of Payments and International Investment Position Manual (BPM6). The inclusion of VOA data has, therefore, been delayed until Blue Book 2015. 

Recent developments in measuring housing costs

On 21 November 2013, the UK Statistics Authority confirmed the designation of CPIH as a National Statistic. CPIH is a measure of UK consumer price inflation that includes owner occupiers’ housing costs (OOH). CPIH makes use of VOA data on rents similar to that which National Accounts will utilise at Blue Book 2015.

The HHFCE implied deflator is derived by dividing HHFCE current price data (including price effects) by the corresponding chained volume measure (excluding the price effects).  This can be used to determine price pressures in the economy.  It is also used in the calculation of the expenditure-based GDP deflator.

In 2013, fluctuations in the current price (“nominal”) estimate of HHFCE on rental have meant that the implied deflator has diverged further from the CPIH measure .Following the delay to the introduction of VOA data to the HHFCE methodology and the designation of CPIH, it has been decided that estimates of HHFCE on actual and imputed rental will be inflated using the appropriate CPIH measure. This is an improvement on the current methodology used for deriving inflated rental data using a very small sample provided by the Living Costs and Food Survey (LCF). The change will initially be applied from Q1 2013 only and will be implemented incrementally according to the National Accounts Revisions Policy. 

This change does not mean that the implied deflator for HHFCE on actual and imputed rental will fully match the equivalent measure from CPIH as differences in the method and source data for stocks of housing will continue.

Timetable for developments to HHFCE

The interim improvement will take effect from the month 2 estimate of GDP for Q4 2013, published on Wednesday 26 February.  A new method for HHFCE on rentals, taking into account VOA data and enhancements to other aspects of the methodology, will be introduced at Blue Book 2015.  As with the interim measure, it is unlikely at this point that HHFCE on actual and imputed rental will exactly match CPIH due to differing methodologies in their compilation, for example varying weighting methods for low level components.

The timetable for using the CPIH in the compilation of HHFCE on actual and imputed rental is:

Publication Date Time period
M2 GDP Q4 2013 26 February 2014 Q1 2013 - Q4 2013
M3 GDP Q4 2013 28 March 2014 Q1 2012 - Q4 2013
Blue Book 2014 30 September 2014 Q1 2010 - Q2 2014
Blue Book 2015 TBC 2015 Q1 1997 - Q2 2015*

* = Introduction of new methodology for the compilation of HHFCE on actual and imputed rental 

Impact of change

The alignment of HHFCE on actual and imputed rental with the CPIH will affect nominal HHFCE and the expenditure-based GDP deflator at market prices.  This is used to deflate the current price income-based market price estimate to provide a chained volume measure (“real”) estimate of the total income component of GDP for balancing purposes. Chained volume measure HHFCE remains unchanged.

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