Owner Occupiers’ Housing Costs
using the Net Acqusitions approach
James Wells, Office for National Statistics
Introduction
This article introduces a UK measure of owner occupiers' housing costs (OOH) using the net
acquisitions (NA) approach, which has been produced to meet European Commission (hereon
referred to as Eurostat) regulation No. 93/20131. A back series is available from Q1 2005 in an
Excel file accompanying this article.
Owner occupiers’ housing costs are the costs associated with owning, maintaining, and living in
one’s own home. There are many methods for measuring these costs, two such methods are net
acquisitions and rental equivalence.
In addressing its requirements, the UK has decided that rental equivalence is its preferred measure
of OOH costs for incorporation in UK consumer price inflation. This approach uses the rent paid for
an equivalent house in the private sector as a proxy for the costs faced by owner occupiers’. In
other words it answers the question “how much would I have to pay in rent to live in a home like
mine?” for an owner occupier.
The Board of the UK Statistics Authority accepted the National Statistician’s recommendation to
use the rental equivalence approach to measure OOH in September 2012 following a report from
CPAC2, a public consultation3 and a review carried out by the National Statistician. CPIH was then
launched in early 2013.
To ensure comparability across member states Eurostat has chosen net acquisitions as its
preferred method for including OOH costs in the Harmonised Index of Consumer Prices4 (HICP).
The final decision whether to incorporate OOH costs (using net acquisitions) in HICP will be taken
in early 2018 when Eurostat will publish a report addressing the suitability of OOH indices for
integration into HICP coverage.
Net acquisitions is a method for measuring OOH costs that are associated with the purchase and
ongoing ownership of dwellings for own use. Net acquisitions treats a home as the purchase of a
good that is part asset (the land) and part consumable (the house), plus costs associated with
buying and maintaining a house; for example, self builds and renovations, repairs and
maintenance, transfer costs and dwelling insurance.
1
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=uriserv:OJ.L_.2013.033.01.0014.01.ENG
CPAC 2012 Annual Report; http://www.ons.gov.uk/ons/guide-method/development-programmes/otherdevelopment-work/consumer-prices-advisory-committee/cpac-papers/consumer-prices-advisory-committee--2012-annual-report.pdf
3
Public consultation: http://www.ons.gov.uk/ons/about-ons/get-involved/consultations/archivedconsultations/2012/owner-occupiers-housing-costs/index.html
4
HICP is a consumer price index which is compiled according to a methodology that has been harmonised
across EU countries. This is currently the same index as the CPI in the UK.
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
Eurostat has named the new index OOHI, although within the UK it will be known as OOH(NA), to
ensure clear distinction between the UK’s preferred measure of OOH, which uses the rental
equivalence approach and is known as OOH(RE).
Production of OOH(NA) follows the structure, definitions and methodology set out in two Eurostat
publications; ‘Technical Manual on Owner Occupied Housing for Harmonised Index of Consumer
Prices 2012’5 and ‘Methodological manual on Owner Occupied Housing Price Indices 2013’6.
Background
Many OOH costs are currently excluded from HICP. This is because of the practical difficulties,
both in determining the most appropriate way of calculating these costs and in obtaining the
necessary data to do so. Inclusion of OOH costs in HICP is recognised as a high priority by
Eurostat and for many years it has been working with member states towards the development of a
measure of OOH using the net acquisitions approach.
Regulation 93/2013 committed member states to producing a quarterly measure of OOH using the
net acquisitions approach by Q3 2014. Thereafter member states are required to produce the
index within an 85 day period from the end of each quarter to which data relates. The first delivery
of OOH(NA) in Q3 2014 therefore contained an index that related to the Q2 2014 period. The
regulation also committed member states to producing a back series from Q1 2010.
While Eurostat has no immediate plans to publish OOH(NA) following receipt of the index from
member states, it has made an informal commitment to quality assure the indices by 2017.
However, regulation 93/2013 does commit Eurostat to preparing a report early in 2018 that will
establish the degree of compliance with regulation 93/2013 by member states and address the
suitability of OOH indices for integration into HICP coverage.
OOH(NA) Methods
The Eurostat classification system for net acquisitions groups indices measuring different aspects
of OOH costs into two classes; those related to the acquisition of dwellings, and those related to
the ownership of dwellings (see Table 1 below).
The ‘net’ principle in net acquisitions relates to the fact that only house sales transactions ‘net’ of
those that occur between households within the OOH sector should be included. In other words,
only transactions that occur between the OOH sector and other sectors should be included. “Other
sectors” captures sales, either into or out of the OOH sector, by construction firms, local
authorities, housing associations, private landlords, and businesses.
HICP does not cover investment spending, therefore one of the major difficulties in determining
how to measure OOH costs relates to separation of the capital investment element of a house
purchase from the consumption expenditure element. The net acquisitions approach attempts this
by treating the land component as capital investment (to exclude from the index) and the house
structure as consumption expenditure (to include in the index).
Eurostat acknowledges that, from a conceptual point of view, the ideal method for excluding the
land component is the net/net approach, whereby prices and weights both exclude the land
component. However, as many member states are unable to implement the net/net approach, due
5
http://epp.eurostat.ec.europa.eu/portal/page/portal/hicp/documents_meth/OOH_HPI/Detailed_Technical_Ma
nual_on_Owner-Occupied_Housing-v2.pdf
6
http://epp.eurostat.ec.europa.eu/portal/page/portal/hicp/documents_meth/OOH_HPI/Methodological_manua
l_referred_in_Reg_93_2013.pdf
Office for National Statistics
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
to a lack of available data, Eurostat requires all member states to use the net/gross (net weight,
gross price) approach even if a net/net approach is feasible. Eurostat has taken this decision to
ensure comparability across member states.
The net acquisitions approach references three measures of works that are generally carried out
by owner occupiers; minor repairs and maintenance, major repairs and maintenance and
renovations.
The distinction between minor and major repairs and maintenance works is explained by Eurostat
using an analogy related to tenants and owners and the types of work carried out by each. Minor
repairs and maintenance relates to the work a tenant might carry out on a rental property, i.e. low
volume work, which does not extend the life of the dwelling or improve the dwelling compared to its
original state. However, as minor repairs and maintenance is already included in HICP it is out of
scope for OOH(NA). Major repairs and maintenance on the other hand, refers to the type of works
only carried out by an owner of a property, i.e. works that bring a dwelling feature back to its
original quality, therefore helping to extend the life of the dwelling.
Renovation works is distinct from minor and major repairs and maintenance as it improves the
quality of the dwelling. It involves the replacement of, or addition too, an existing feature, that
improves the quality of that feature; for example, replacement of single glazed windows with
double glazing.
OOH(NA) component price indices
Table 1: Source of prices data used in OOH(NA)
Acquisition of dwellings
OOH(NA)
Indices
Acquisition of
New Dwellings
(exc. Land)
Self Builds &
Renovations
Source of
Price Data
House Price
Index
Producer Prices
Index &
Harmonised Index
of Consumer Prices
Ownership of dwellings
Existing
Insurance
Services Related to Major Repairs &
Dwellings new to
Connected with
Acquisition
Maintenance
the OOH Sector
the Dwelling
House Price
Index
Retail Prices Index
&
a stamp duty index
Harmonised
Index of
Consumer
Prices
Retail Prices
Index
The sources of component price indices are included in Table 1 above and with the exception of
the stamp duty index, are all drawn from existing ONS publications.
Eurostat requires member states to use the House Price Index (HPI) to measure house prices
within the ‘Acquisition of New Dwellings’ and ‘Existing Dwellings New to the OOH Sector’
components. However, HPI does not follow the full net acquisitions concept, as it includes the price
of land, therefore the method that Eurostat follows is the gross/net approach (gross price/net
weight). In other words it uses HPI which includes the cost of land and an expenditure weight from
the National Accounts that excludes it.
‘Self Builds and Renovations’ is composed of separate materials and services indices. The
materials index is composed of item level indices from the Producer Price Index that reflect the
materials used for self builds and renovation works. The services index is composed of item level
indices from HICP that reflect the labour costs associated with self builds and renovation works.
Office for National Statistics
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
‘Services Related to Acquisition’ is composed of separate transfer costs and stamp duty indices.
Transfer costs is composed of item level indices from the Retail Prices Index7 that reflect costs on
estate agent fees, legal fees and home buyers surveys. The stamp duty index is constructed from
HMRC stamp duty land tax rates and house sales data by price band acquired from The Land
Registry.
‘Major Repairs and Maintenance’ is composed of separate materials and services indices, both of
which are constructed using item level indices from HICP to reflect the materials and labour costs
associated with major repairs and maintenance of a dwelling.
‘Insurance Connected with the Dwelling’ is composed of an item level index from RPI7 associated
with dwelling insurance. The index relates to insurance connected with the dwelling structure only
and does not include insurance related to household contents.
OOH(NA) component weights
The source of component expenditure weights used to compile OON(NA) are derived from the
National Accounts Gross Fixed Capital Formation (GFCF) and Household Final Consumption
Expenditure (HHFCE), which is outlined in Table 2 below. The relative weight of OOH(NA)
components are outlined in Table 3 below. Aggregate weights are outlined in Table 4 below.
Table 2: Source of weights data used in OOH(NA)
Acquisition of dwellings
OOH(NA)
Indices
Acquisition of
New Dwellings
(exc. Land)
Self Builds &
Renovations
Ownership of dwellings
Existing
Insurance
Services Related to Major Repairs &
Dwellings new to
Connected with
Acquisition
Maintenance
the OOH Sector
the Dwelling
Source of
Gross Fixed
Gross Fixed
No weight
Weight data Capital Formation Capital Formation currently exists
Household Final
Household Final Household Final
Consumption
Consumption
Consumption
Expenditure
Expenditure
Expenditure
& Gross Fixed
Capital Formation
As with all HICP weights, the National Accounts data relates to two years prior to the current year
(the latest data available when the weights are being set) and are price updated to December of
the previous year. For example, for 2014, the underlying expenditure data refer to the 2012
calendar year and are price updated to reference period December 2013. Weights have been price
updated using the OOH(NA) component price indices to which each weight is associated with.
Current limitations of OOH(NA) include the weight for ‘Acquisition of New Dwellings’, which
includes expenditure on all newly constructed dwellings and not those specifically destined for the
OOH sector as per the methodology outlined by Eurostat. In addition, a weight for ‘Existing
Dwellings New to the OOH Sector’ does not exist, therefore, a zero weight is currently applied.
7
HICP and RPI use different formulae to aggregate individual price quotes into elementary aggregate indices
(EAs) for individual items. Eurostat regulations effectively prohibit use of the Carli formula (arithmetic
average of price relatives) in HICP, which is frequently used in RPI. Item level indices taken from RPI for use
in OOH(NA) are therefore recalculated using a Jevons formula (geometric mean), which is the preferred
formula for use in the UK HICP.
Office for National Statistics
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
Table 3: OOH(NA) component weights, parts per 100, 2005-2014*
Acquisition of dwellings
Ownership of dwellings
Year
Acquisition of
New Dwellings
(exc. Land)
Self Builds &
Renovations
Existing
Dwellings
new to the
OOH Sector
Services
Related to
Acquisition
Major Repairs
& Maintenance
Insurance
Connected with
Dwelling
2005
24.1
33.9
-
23.1
14.5
4.4
2006
27.8
32.7
-
23.0
14.4
2.1
2007
31.2
33.2
-
21.0
12.8
1.8
2008
31.3
30.7
-
24.7
11.2
2.1
2009
26.7
33.8
-
25.6
11.6
2.3
2010
25.8
39.4
-
16.8
15.4
2.6
2011
22.8
41.3
-
15.4
17.7
2.8
2012
22.4
41.1
-
17.2
16.5
2.8
2013
25.0
41.2
-
15.2
16.5
2.1
2014
26.0
39.6
-
17.7
14.6
2.1
*Derived from the UK’s National Accounts GFCF and HHFCE
Table 4: OOH(NA) component aggregate weights, parts per 100, 2005-2014*
Year
Acquisition of
Dwellings Total
Ownership of
Dwellings Total
Total
2005
81.1
18.9
100
2006
83.5
16.5
100
2007
85.4
14.6
100
2008
86.7
13.3
100
2009
86.1
13.9
100
2010
82.0
18.0
100
2011
79.5
20.5
100
2012
80.7
19.3
100
2013
81.4
18.6
100
2014
83.3
16.7
100
*Aggregate weights composed from component weights in Table 3 above
OOH(NA) and CPI series
Figure 1 below shows the 12 month percentage change for OOH(NA) and its high level
aggregates, ‘Acquisition of Dwellings’ and ‘Ownership of Dwellings’; Figure 2 shows the index for
these components.
Between Q1 2006 to Q3 2014, OOH(NA) increased by an average of 2.3%. From Q1 2006
OOH(NA) increased from 3.2% to a peak of 6.6% in Q3 2007, before falling to -5.5% in Q2 2009,
following the crash in the housing market in 2008. OOH(NA) then recovered to 5.4% in Q3 2010
and subsequently experienced an average growth of 2% between Q4 2010 and Q3 2013. Since
Q3 2013 OOH(NA) has started to increase again and reached 4.1% in Q3 2014.
Office for National Statistics
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
It can be seen that OOH(NA) closely tracks ‘Acquisition of Dwellings’ across the time series, which
is due to the large weight for this component (see Table 4 above). ‘Ownership of Dwellings’ fell
sharply between Q1 2011 and Q2 2013, reaching -1.7% by the end of this period. The fall in
percentage change for ‘Ownership of Dwellings’ was mostly driven by a sharp decrease in the
price of dwellings insurance over this period.
Figure 1: OOH(NA), ‘Acquisition of Dwellings’ and ‘Ownership of Dwellings’ 12 month
percentage change 2006-14
8.0
12 month percentage change
6.0
4.0
2.0
0.0
-2.0
-4.0
OOH(NA)
Acquisition of dwellings
Ownership of dwellings
-6.0
-8.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 2: OOH(NA), ‘Acquisition of Dwellings’ and ‘Ownership of Dwellings’ Indices, Q1
2005 = 100, 2005-14
135
130
125
Index
120
115
110
OOH(NA)
Acquisition of dwellings
Ownership of dwellings
105
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Office for National Statistics
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Owner Occupiers’ Housing Costs using the Net Acqusitions approach
Next Steps and Future Developments
Next Steps
Eurostat received the first delivery of OOH(NA) in Q3 2014. Regulation 93/2013 commits ONS to
delivering quarterly indices within an 85 day period from the end of each quarter to which the data
relates. ONS will make data delivered to Eurostat available to UK users via its website, in line with
the timings stipulated by 93/2013.
Although Eurostat has only made an informal commitment to quality assure OOH(NA) by 2017,
93/2013 commits it to preparing a report early in 2018 that will establish the degree of compliance
with 93/2013 by member states and address the suitability of OOH indices for integration into HICP
coverage.
Future development
In the future construction output price indices published by The Department for Business,
Innovation and Skills (BIS) could be used to replace PPI and CPI item level indices currently used
to construct the ‘Renovations and Self Builds’ and ‘Major Repairs and Maintenance’ price indices
components of OOH(NA).
In 2011 ONS, in conjunction with the Consumer Prices Advisory Committee (CPAC), investigated
the suitability of using this index in OOH(NA). At the time it was produced under contract by
Building Cost Information Service (BCIS) for BIS. This option was ruled out by CPAC8 based upon
the quality, periodicity and timeliness of the indices at the time.
Since this time, production of the construction output series has been re-tendered and awarded to
a company called AECOM, which is committed to developing the indices in line with user
requirements. In July 2014 BIS held a user consultation9 to gather feedback on user requirements.
Results from the consultation are currently being analysed and will be published in due course.
ONS’s Prices Division provided feedback to the consultation in line with a view to including the
indices in OOH(NA) at some point in the future.
8
http://www.ons.gov.uk/ons/guide-method/development-programmes/other-development-work/consumerprices-advisory-committee/cpac-papers/cpac-papers---march-2011-meeting.zip
9
https://www.gov.uk/government/consultations/construction-price-and-cost-indices-methodological-changes
Office for National Statistics
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