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NIPA imputed rent

This page is about the imputation of gross and net rent in personal consumption expenditures and personal income of the NIPA. The purpose is to clarify some accounting that is often misunderstood.

Summary

3 Apr 2010.

Under the NIPA, a homeowner-occupant is treated as a pair of entities. One is a tenant, who pays an imputed gross rent, included in Personal Consumption Expenditures (PCE) and thence in GDP, for the service provided by the house. The other entity is a landlord, who runs a small business owning and renting the house; the landlord has a net income, included in Personal Income (PI) and thence in National Income, constituting the gross rent less mortgage interest, property tax, maintenance, insurance and depreciation. The income of the landlord entity is essentially the operating profit of the business, and so is naturally much smaller than the expenditure of the tenant entity.

Imputed (gross) rent is calculated as the number of owner-occupied units, times the average rent of equivalent tenant-occupied units, in several property value tiers, using Census data.

The goal of imputation, in general, is to keep the accounts invariant when the same goods are produced/consumed in different ways. The same shelter is provided by a house whether the house is owned by the occupant or by someone else. Imputed rent may seem more natural if one imagines the extreme case of a society where everyone raises their own food and builds their own houses; without imputation the GDP would be zero.

Highlights

Clippings below covered through Jul 2008.

An overview (4 Apr 2010) “The rental value of tenant-occupied housing and the imputed rental value of owner-occupied housing are both part of PCE housing services, reflecting the amount of money tenants spend for the service of shelter and the amount of money owner occupants would have spent had they been renting. Owner-occupied housing is included in PCE because the NIPAs treat the owner-occupant as if it were a rental business, or in other words, a landlord renting to him or herself. That is, BEA imputes a value for the services of owner-occupied housing (space rent) based on the rents charged for similar tenant-occupied housing, and this value is included in GDP as part of personal consumption expenditures. This imputation is necessary in order for GDP to be invariant when housing units shift between tenant occupancy and owner occupancy.

The income generated from housing services is used to pay expenses such as maintenance and repairs, property taxes, and mortgage interest, leaving a profit-like remainder of business income that is mostly recorded as rental income of persons in the NIPAs. (See the example for 2006 in table A below.) Rental income of persons is the net income of persons from the rental of property. It consists of the net income from the rental of tenant-occupied housing owned by persons, the imputed net income from the housing services of owner-occupied housing, and the royalty income of persons from patents, copyrights, and rights to natural resources. It does not include the net income from rental of tenant-occupied housing owned by corporations (which is included in corporate profits) or by partnerships and sole proprietors (which is included in proprietors’ income). Like other measures of income in the NIPAs, rental income of persons measures income from current production and excludes capital gains or losses resulting from changes in the prices of existing assets.” (From a Sep 2007 factsheet.)


National income and product accounts background (4 Apr 2010) The national income and product accounts (NIPA), calculated by the Bureau of Economic Analysis, are a double entry accounting system of all US production of goods and services and the income that results. Every payment for goods or services is recorded as a payment from one sector to another (or the same) sector, where the sectors are business, household, government, and rest-of-world.

The accounts also treat savings and investment. For each sector there is a production account, an income and outlay account, and a capital account. The treatment of some items differs between these accounts. For example, transfer payments are included in income in an income and outlay account, but not in a production account.

The treatment of homes occupied by the owner sometimes causes confusion. An owner-occupant is treated as a pair of entities. One is a tenant, who pays an imputed gross rent, included in Personal Consumption Expenditures (PCE) and thence in GDP, for the service provided by the house. The other entity is a landlord, who runs a small business owning and renting the house; the landlord has a net income, included in Personal Income (PI) and thence in National Income, constituting the gross rent less mortgage interest, property tax, maintenance, insurance and depreciation.


Calculation of the imputed rent (11 Dec 2008) “Estimates of space rent for tenant- and owner-occupied housing are estimated as the number of tenant-occupied (or owner-occupied) units times the average rental value (or imputed rental value). These estimates are benchmarked to units data from the decennial Census of Population and Housing and rental values from the Census Bureau’s decennial Residential Finance Survey (RFS). For owner-occupied housing the average contract rent on 1-unit rental and vacant nonfarm properties, as reported in the RFS, is imputed, by property value class, to owner-occupied units, as reported in the biennial American Housing Survey (AHS). The benchmarked estimates are interpolated and extrapolated using average rents from the AHS and the Current Population Survey, consumer price indexes for rent from the Bureau of Labor Statistics, and BEA adjustments to imputed rent for quality changes to the stock of housing. Estimates of tenant- and owner-occupied housing expenses for mortgage interest and property taxes are benchmarked to the RFS. Closing costs and maintenance and repair expenses are benchmarked to BEA’s quinquennial benchmark input-output accounts. Estimates are interpolated or extrapolated between benchmark years with various annual and quarterly data sources.” (from the same Sep 2007 factsheet)


Fairly standard approach

  • 1947 establishment of NIPA (11 Dec 2008) A 1947 discussion of standards set when the NIPA were put in place gives the approach still used.
  • Academic economics (4 Apr 2010) According to one academic paper, “Most economists agree that the rental value of a dwelling is part of the income of an owner-occupant”.
  • International standard (11 Dec 2008) The 1947 discussions standardized treatment between the UK, Canada, and the US. See also a Mar 1994 entry for Australia and an undated entry for Finland.



Motivation (4 Apr 2010) The BEA say: “Imputations keep the accounts invariant to how certain activities are carried out (for example, an employee may be paid either in cash or in kind). Both a measure of production and the incomes associated with that production are imputed (for example, the imputation for food furnished to employees is included in PCE and in personal income). The largest NIPA imputation is that made to approximate the value of the services provided by owner-occupied housing.” Imputations may seem more natural if one imagines the extreme case of an agrarian society where people build their own homes and raise most of their own food; here GDP would be near zero with no imputations.

Sources

The clearest overall summary in the NIPA documentation is http://www.bea.gov/papers/pdf/RIPfactsheet.pdf.

See also

Clippings below were used in the construction of this page

Finland's definition

undated. Statistics Finland web site.

http://stat.fi/meta/kas/asuntotulo_en.html

“Dwelling income or imputed net rent”

“Dwelling income or imputed net rent describes the benefit gained by the household for the owner-occupied dwelling it lives in compared with a corresponding household living in a rental dwelling with market rent. Dwelling income from living in an owner-occupied dwelling is the difference obtained when actual operating costs of the dwelling (e.g. interest on housing loan, insurance, maintenance charges and maintenance costs) from the so-called imputed gross rent. Dwelling income may become negative if the deduction items exceed the gross rent.”

Early discussions defining the NIPA agreed to include net imputed rent in national income

1947. NBER report on early discussions defining the NIPA.

http://nber15.nber.org/bookcv_1/STUDIES%20IN%20INCOME%20AND%20WEALTHER-NA_NA-1947.CV.pdf

“Studies in Income and Wealth VOLUME TEN.

PART I Proposed Changes in the Measurement of National Product by the Department of Commerce.

Report on Tripartite Discussions of National Income Measurement. EDWARD F. DENISON ”

“The net imputed rent on owner-occupied dwellings is to be included in national income and gross and net national product. …

As a result of the Washington discussions, most of the quantitatively important differences among the three countries in measuring national income and national product will be eliminated. The treatment of … imputed rent on owner-occupied dwellings will be uniform as a consequence of the adoption by the United States and Canada of the United Kingdom methodology. …

Net rents. Like entrepreneurial income and corporate profits, this return is computed net of costs. It is basically a special type of entrepreneurial net income realized by individuals from real estate they own and either rent or use for housing as owner-occupants. In the latter case, the return is an imputed net rent; the Department of Commerce is increasing its national income coverage to include this item. … it is best to view gross rents paid by tenants simply as payments for property-use services. Net rents then become a specialized business profit.”

Standard economics view of imputed rent

1960. The Journal of Finance, Vol. 15, No. 4 (Dec., 1960), pp. 504-530

“Imputed Rent of Owner-Occupied Dwellings Under the Income Tax. Richard Goode”

“Most economists agree that the rental value of a dwelling is part of the income of an owner-occupant … taxation of imputed rent has been recommended … The usual proposal is for the taxation of net rent, defined as imputed gross rent minus necessary expenses of ownership. The expenses consist of interest on mortgage debt, property taxes, depreciation, repairs and maintenance, and casualty insurance.”

The UN and Australian definitions of imputed net rent

Mar 1994. Review of Income and Wealth.

“IMPUTED RENT AND INCOME DISTRIBUTION. BY JUDITH YATES”

“In 1977 the UN issued a set of Provisionial Guide-lines on Statistics of Distribution of Income, Consumption and Accumulation of Households (UN, 1977). These Guide-lines recommended that imputed income from owner-occupied hous- ing be included in the property income component of household income along with interest, dividends and rent receipts and that this, along with transfer and benefit income, be added to primary income to give the preferred measure of total household income. In a like manner, rental expenditure should also be imputed as an item of household consumption. …

The most widespread inclusion of imputed rent into income statistics occurs in the National Accounts. The United Nations System of National Accounts (UN, 1968), first published in 1953 with the intent of providing a uniform of basis for reporting national income statistics, defines a preferred approach: “The total of owner-occupied dwellings which is to be included in gross output should, in principle, be valued at the rent on the market of the same facilities. It may be necessary to approximate the market rent by an estimate which should cover items such as operating, maintenance and repair outlays, water charges, insurance service charges, taxes, depreciation and mortgage interest in addition to interest on the owner's investment in the dwelling and other elements of net return.” (UN 1968:6.22) …

In the Australian National Accounts, gross operating surplus (GOS) from owner-occupied dwellings is defined as gross rent (GR) less operating costs (C) associated with rates, insurance, maintenance etc. That is

(I) GOS = GR-C.

The definition of gross operating surplus given in equation (1) is that which is attributed as income from owner-occupied housing in the income based measure of gross domestic production; operating costs are excluded as intermediate transactions recorded in the incomes of the respective recipients. Gross rent (including operating costs) is included in the expenditure based measure. This measure of imputed rent is equivalent to the first (market value) approach proposed by the UN. Some of the empirical difficulties associated with the measurement of gross rent based on this approach are discussed in Section 3 below. Sectoral Measure of Imputed Rent If depreciation (D) is allowed for, the net operating surplus from dwellings is given by

(2) NOS = GOS-D = GR-C-D

and if interests costs (I) as well as depreciation are taken into account, the net income (NR) from dwellings is given by

(3) NR = NOS-I = GR-C-D-I.

The measure of net rental income given in equation (3) is that which is incorporated in household income in the household account. All deductions are excluded as intermediate transactions representing intra- or inter-sectoral transfers of income from the household sector to other households or to other sectors (government, corporate etc.). Again gross rent is included in outlays.' Equation (3) can be given in terms of gross rent with

(4) GR = NR + C + D-I-I.

Given NR represents the “interest on the owner's investment in the dwelling and other elements of net return,” equation (4) outlines the second (opportunity cost) approach to measuring imputed rent proposed by the UN. … Equations (1), (3) and (4) indicate that measures of housing income in the National Accounts differ depending on the level of aggregation employed.”

Factsheet on the imputed rent

11 Sep 2007. BEA fact sheet on imputed rent.

http://www.bea.gov/papers/pdf/RIPfactsheet.pdf

“Housing Services in the National Economic Accounts. by Nicole Mayerhauser and Marshall Reinsdorf”

“Housing services are a component of personal consumption expenditures (PCE), and consequently part of GDP, in the national income and product accounts (NIPAs). The rental value of tenant-occupied housing and the imputed rental value of owner-occupied housing are both part of PCE housing services, reflecting the amount of money tenants spend for the service of shelter and the amount of money owner occupants would have spent had they been renting. Owner-occupied housing is included in PCE because the NIPAs treat the owner-occupant as if it were a rental business, or in other words, a landlord renting to him or herself. That is, BEA imputes a value for the services of owner-occupied housing (space rent) based on the rents charged for similar tenant-occupied housing, and this value is included in GDP as part of personal consumption expenditures. This imputation is necessary in order for GDP to be invariant when housing units shift between tenant occupancy and owner occupancy.

The income generated from housing services is used to pay expenses such as maintenance and repairs, property taxes, and mortgage interest, leaving a profit-like remainder of business income that is mostly recorded as rental income of persons in the NIPAs. (See the example for 2006 in table A below.) Rental income of persons is the net income of persons from the rental of property. It consists of the net income from the rental of tenant-occupied housing owned by persons, the imputed net income from the housing services of owner-occupied housing, and the royalty income of persons from patents, copyrights, and rights to natural resources. It does not include the net income from rental of tenant-occupied housing owned by corporations (which is included in corporate profits) or by partnerships and sole proprietors (which is included in proprietors’ income). Like other measures of income in the NIPAs, rental income of persons measures income from current production and excludes capital gains or losses resulting from changes in the prices of existing assets.

For tenant-occupied property, rental income of persons is the net income of the landlord from current production. It is calculated as the output of housing services (the rental value or “space rent”) less the related expenses, such as depreciation, maintenance and repairs, property taxes, and mortgage interest.

For owner-occupied property, rental income of persons is the imputed net income of the owner. It is calculated as the imputed output of housing services (space rent) less the expenses associated with owner-occupied housing, such as depreciation, maintenance and repairs, property taxes, and mortgage interest. …

Estimates of space rent for tenant- and owner-occupied housing are estimated as the number of tenant-occupied (or owner-occupied) units times the average rental value (or imputed rental value). These estimates are benchmarked to units data from the decennial Census of Population and Housing and rental values from the Census Bureau’s decennial Residential Finance Survey (RFS). For owner-occupied housing the average contract rent on 1-unit rental and vacant nonfarm properties, as reported in the RFS, is imputed, by property value class, to owner-occupied units, as reported in the biennial American Housing Survey (AHS). The benchmarked estimates are interpolated and extrapolated using average rents from the AHS and the Current Population Survey, consumer price indexes for rent from the Bureau of Labor Statistics, and BEA adjustments to imputed rent for quality changes to the stock of housing. Estimates of tenant- and owner-occupied housing expenses for mortgage interest and property taxes are benchmarked to the RFS. Closing costs and maintenance and repair expenses are benchmarked to BEA’s quinquennial benchmark input-output accounts. Estimates are interpolated or extrapolated between benchmark years with various annual and quarterly data sources. …

personal saving in the NIPAs is the amount of disposable personal income left over after deducting personal consumption expenditures, personal interest expenses and net current transfer payments. Nevertheless, because uses of personal income to acquire assets are not counted as consumption and thus deducted as part of the saving calculation, they are included in personal saving. One such use of personal income is the building up of equity in residences via down payments on home purchases and repayments of mortgage principle.

Of course, in the aggregate, repayment of mortgage principle by persons need not be positive. Indeed, in recent years, net mortgage borrowing has been substantially larger than investment in residential real estate by persons. In BEA’s Fixed Assets accounts for 2006, investment net of consumption of fixed capital by the personal sector in residential fixed assets is $486.5 billion. The Flow of Fund Accounts of the Federal Reserve Board provides details on the financing of this investment. They show a net increase in personal sector mortgage liabilities of $828.4 billion (see table F.100). These figures imply dissaving by persons of $341.9 billion, or 3.6 percent of disposable personal income. Despite this dissaving, the value in current dollars of personal sector home equity rose in 2006 because capital gains on residential real estate were $1.063 trillion. Capital gains are a part of change in wealth, but they are not part of the NIPA concepts of income and saving. Capital gains are excluded from saving because they represent changes in prices of pre-existing assets …

the depreciation and cash expenses borne by owner-occupiers that are deducted from their rental income do reduce the measure of personal saving. In 2006, household owner-occupiers’ expense for depreciation amounted to almost 2 percent of disposable personal income, and their cash expenditures on intermediate inputs for upkeep, maintenance and repair, on property taxes, and on mortgage interest amounted to over 8 percent of disposable personal income.”

NIPA handbook chapters 1 and 2

Jul 2008. Primary source from NIPA on the nature of the accounts.

http://www.bea.gov/national/pdf/NIPAhandbookch1-4.pdf:

“Concepts and Methods of the U.S. National Income and Product Accounts (Introductory Chapters 1–4)”

”[HISTORY] The U.S. national income and product statistics were first presented as part of a complete and consistent double-entry accounting system in the summer of 1947. The accounts presented a framework for classifying and recording the economic transactions among major sectors: households, businesses, government, and international …

[IMPUTATIONS] imputations keep the accounts invariant to how certain activities are carried out (for example, an employee may be paid either in cash or in kind). Both a measure of production and the incomes associated with that production are imputed (for example, the imputation for food furnished to employees is included in PCE and in personal income). The largest NIPA imputation is that made to approximate the value of the services provided by owner-occupied housing. … keeping GDP invariant as to whether a house is owned or rented. In the NIPAs, the purchase of a new house (excluding the value of the unimproved land) is treated as an investment, the ownership of the home is treated as a productive enterprise, and a service is assumed to flow, over its economic life, from the house to the occupant. For the homeowner, the value of this service is measured as the income the homeowner could have received if the house had been rented to a tenant. …

[GDP - Theoretically equivalent approaches] In the NIPAs, GDP is defined as the market value of the final goods and services produced by labor and property located in the United States. Conceptually, this measure can be arrived at by three separate means: as the sum of goods and services sold to final users, as the sum of income payments and other costs incurred in the production of goods and services, and as the sum of the value added at each stage of production (chart 2.1). Although these three ways of measuring GDP are conceptually the same, their calculation may not result in identical estimates of GDP because of differences in data sources, timing, and estimation techniques. …

  • GDP (final expenditures) = Personal consumption expenditures + Gross private domestic fixed investment + Change in private inventories + Government consumption expenditures and gross investment + Net exports
  • GDI (sum of income payments and costs incurred in production) = compensation of employees + taxes on production and imports, less subsidies + net operating surplus + consumption of fixed capital.
  • Gross value added = Gross output less intermediate purchases, across all private industries and government. …

[SECTORS] For measuring domestic production in the NIPAs, the contribution, or value added, of various institutions can be broken down into three distinct groups, or sectors— business, households and institutions, and general government. A fourth sector, “the rest-of-the-world” sector, covers transactions between the United States and foreigners. …

  • Households and institutions: The households and institutions sector comprises households and nonprofit institutions serving households (NPISHs). NPISHs provide services in the following categories: religious and welfare, medical care, education and research, recreation, and personal business. The gross value added of households is measured by the services of owner-occupied housing and the compensation paid to domestic workers. The gross value added of NPISHs is measured by the compensation paid to the employees of these institutions, the rental value of fixed assets owned and used by these institutions, and the rental income of persons for tenant-occupied housing owned by these institutions.”