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Rented dwellings in the CPI

Actual rentals for housing had an expenditure weight of 6.87 percent of the Consumers Price Index (CPI) as at the June 2006 quarter, making it the highest weighted class within the CPI. By comparison the purchase of new housing, with a weight of 4.66 percent, ranked third, behind petrol (5.38 percent).

What's in a name?

The New Zealand Household Expenditure Classification (NZHEC) was adopted with the release of the September 2006 quarter CPI. The classification is based on the international standard United Nations' (UN) Classification of Individual Consumption According to Purpose (COICOP) and has been adapted to suit New Zealand conditions. The 2004 CPI Revision Advisory Committee recommended that Statistics New Zealand should base the CPI classification system on the upper-level structure of COICOP (recommendation 11). The committee noted that "the standard COICOP classification may not be entirely appropriate for use in New Zealand, and should be modified accordingly as had occurred in Australia."

The UN COICOP was developed under a consumption (or use) framework primarily for use in the consumption expenditure part of the national accounts. Broadly speaking, consumer price indexes can be compiled under 'use', 'acquisitions' and 'payments' frameworks. The New Zealand CPI, like the Australian CPI, is compiled using an acquisitions framework (with a payments-type add-on in the form of the 'CPI all groups plus interest' index). Under an acquisitions framework, classification categories within housing are required for expenditure on purchase of housing and on property rates, for example. These categories are not catered for in COICOP, under which owner-occupiers' consumption of shelter services is measured by 'imputed' rents.

As such, COICOP series categories exist for imputed rentals for housing (not used in the New Zealand CPI) and for 'actual' rentals for housing. Imputed rentals for housing is the implicit rent that home-owners pay to themselves to occupy the dwelling, while actual rentals is the rent paid by tenants to landlords.

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Position in CPI structure

The following table shows that the position of actual rentals for housing falls within the housing and household utilities group of the New Zealand Household Expenditure Classification used for the CPI.

Group, subgroup or class Level June 2006 quarter expenditure weight (%)
Housing and household utilities group Group 20.02
Actual rentals for housing Subgroup and class 6.87

 

Actual rentals for housing comprises three price indexes:

  • private and local authority rentals
  • State rentals
  • educational accommodation.

The weighting for each of the three indexes that make up actual rentals for housing are detailed below.

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Expenditure weight estimation

The expenditure weight for actual rentals for housing was derived using independent data sources and the Household Economic Survey (HES).

Information from the 1991, 1996 and 2001 Censuses of Population and Dwellings, the 2000/01 and 2003/04 HES and research by the Reserve Bank of New Zealand on the impact of family trusts on published home ownership rates was used to conservatively extrapolate tenure proportions (home ownership and renting rates) beyond the 2001 Census of Population and Dwellings. These extrapolated home ownership rates were applied to Statistics NZ's time series estimates of the total number of dwellings (included in Dwelling Estimates by Tenure statistics) to derive time series estimates of the number of households renting private or local authority dwellings.

These households were classified by number of bedrooms (one, two, three, four, and more than four), using ratios from the 2001 Census of Population and Dwellings. To estimate expenditure, the resulting figures were multiplied by corresponding average prices for private and local authority rentals from the CPI rented dwellings collection. These average prices excluded Housing New Zealand properties.

Estimated expenditure, broken down by number of bedrooms, for private and local authority rented dwellings, for each of the three years to June 2004 was expressed in 2003/04 prices, averaged, then price updated to the June 2006 quarter.

Administrative data covering expenditure for the years to each of the three years to June 2004 was used to estimate the expenditure weight allocated to Housing New Zealand dwellings.

Educational accommodation is included within actual rentals for housing under the NZHEC classification system, whereas it was included in the accommodation and board section within the old classification system's leisure and recreation subgroup. HES information is used for expenditure on educational accommodation, both tertiary and non-tertiary. However, the HES expenditure represents spending by private New Zealand households on educational accommodation and so expenditure made directly by individuals residing in halls of residence is excluded as non-private household expenditure.

In dollar-value terms, the price-updated expenditure weight of actual rentals for housing is slightly lower (by about 3.4 percent) than it would have been if based solely on the 2003/04 HES. Also in dollar value terms, the 2006 expenditure weight of rentals for housing is 45.2 percent higher than the 2002 weight, reflecting both a relative shift towards renting and, to a lesser extent, rent increases.

The expenditure weight of actual rentals for housing increased from 5.54 percent in 2002 to 6.87 percent in 2006. Within actual rentals for housing, private and local authority rentals account for about 90 percent of the class weight.

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Actual rentals for housing

Each of the three price indexes – private and local authority rentals, State rentals, and educational accommodation – are outlined with respect to sample selection and maintenance, price collection and estimation, below.

Private and local authority rentals

The current survey sample was first surveyed in the September 1998 quarter and introduced into the CPI in the December 1998 quarter. Meshblocks – usually containing around 100 dwellings grouped geographically – from the 1996 Census of Population and Dwellings were clustered into primary sampling units (PSU), which each contained around 10 meshblocks. Each meshblock on average contained 30 rental dwellings. PSUs were then randomly selected and a census of meshblocks within each PSU was taken.

Sixty-eight PSUs and 352 meshblocks were selected for the private and local authority rentals survey from approximately 6,500 PSUs at the time of initial selection.

During 1998, an exercise was undertaken to identify all private and local authority rented dwellings within the selected meshblocks. Questionnaires were sent to all dwellings within these meshblocks to determine whether the dwelling was owner-occupied or a rental property (dwelling refers to all types of dwellings, including apartments, flats, town houses and houses). If the dwelling was a rented dwelling, landlord information was obtained and the landlord was entered into the initial sample. Questionnaires were then sent to landlords to obtain information for all properties they owned and rented within the surveyed meshblocks. However, only unfurnished dwellings were selected to be in the ongoing Quarterly Rents Survey (QRS). Furnished dwellings were excluded, due to possible issues with ongoing quality maintenance. For example, failure to adequately identify changes in the value of the furnishings or the value of rent attributable to the furnished status might result in erroneous movements being shown in the CPI.

Given the possible changes in ownership of dwellings, from rented dwelling to owner-occupied or vice-versa, new bond lodgements with the Department of Building and Housing are used to identify when dwellings within the sampled meshblocks become in scope of the survey (either when an established dwelling starts being rented or when a newly constructed rented dwelling comes onto the market). When such dwellings are identified, they are enrolled into the survey. While the process of identifying new rental dwellings within surveyed meshblocks was introduced in 1999, administrative changes caused the process to lapse in late 2001 and it was not reinstated until the June 2006 quarter.

Rental information (rent and rent frequency) and number of bedrooms are collected quarterly from landlords through the QRS. At the December 2007 quarter, there were around 1,000 respondents for the QRS, providing rents for more than 2,000 dwellings. As the landlord of any selected property is surveyed, changes in tenants do not pose a problem for price collection. This is important given that rents are often reviewed and altered at the beginning of a tenancy.

Average weekly rent for each dwelling type – one, two, three, four, and more than four bedroom dwellings – is calculated for each of five broad regions (Auckland, Wellington, the rest of North Island, Christchurch, and the rest of South Island). The quarterly price movements used in the calculation of the CPI are based on a matched sample of rental dwellings that are common to both the current and previous quarters, to help ensure that changes in the size or composition of the sample of dwellings does not affect the CPI. This is similar to the quality adjustment undertaken in rest of the CPI basket. It is significant that it is the dwelling that is matched each quarter, and as such, price movements that occur with change of tenants (and, if any, vacancy of the dwelling) are reflected in the price changes for private and local authority rentals. Further, by the fixing of the weights for each dwelling type (based on number of bedrooms) between the three-yearly CPI basket and weight reviews, compositional changes in the existing rented dwelling stock are minimised.

The matched sample approach was implemented in the March 2000 quarter after it was found that the addition to the survey of newly identified rental properties was having a significant impact on the average rent levels. This was considered to be most likely due to the quality of newly rented dwellings (and the quality of dwellings no longer being rented) being different on average to the quality of the existing rental dwelling stock. It should be noted that the treatment of newly rented dwellings, under the matched sample approach, would result in any initial price effect not being shown in the CPI.

State rentals

Direct contact is made with Housing New Zealand Corporation (HNZC) for the price indicator for State rentals. Information is obtained each quarter for the geographic location of each dwelling, number of bedrooms, market rent and income-related rent.

As direct contact is made with HNZC, a full list of over 67,000 properties is obtained and monitored on an ongoing basis.

Average weekly income-related rent is calculated for each of the 15 CPI regions (so that regional movements contribute to the CPIs compiled for five broad regions). Each region is weighted according to the standard CPI population weights.

Introduction of income-related rents

In December 2000, HNZC introduced income-related rents for its dwellings, which replaced the previous policy of market-related rents (partly offset by an accommodation supplement based on income). This was shown as a large price fall of 48.0 percent for HNZC rentals in the March 2001 quarter. This was due to the accommodation supplement being considered to be income (hence market rents were used in the CPI), whereas the rent subsidy was directly related, and attributable, to the amount of rent paid; that is, the rent subsidy can be viewed as resulting in a price decrease. This was consistent with the treatment of an earlier policy change, when income-related rents were replaced by market rents.

Educational accommodation

Prices for secondary school boarding are collected to represent educational accommodation. Fees are collected by postal survey from about 40 secondary school boarding hostels. The fees for full board (including laundry charges) for a student in year 10 (fourth form) are collected. Any change in the service provided would be treated as quality change, and hence not shown as price change.

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Changes in rental index series over time

Up until the June 2006 quarter, and prior to the adoption of the NZHEC, educational accommodation was included within the recreation and education group. As such, the actual rentals for housing index (comprising of private and local authority rentals, State rentals and educational accommodation) series has been recalculated from the June 1999 quarter (series reference CPIQ.SE9041).

However, the previously published rented dwellings series covers the period December 1975 quarter to the June 2006 quarter. This series is available (on the previous base of June 1999 quarter (= 1000)) on INFOS under series reference CPY.SE9C1.

Both these series are contained within the attached spreadsheet Actual rentals for housing and rented dwellings.

Back to Price Index News: April 2008

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