ESRI Working Paper

Rental equivalence, owner-occupied housing and inflation measurement: Micro-level evidence from Ireland

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November 18, 2020
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In this paper, we use unique supervisory property-level rental data to estimate a rental equivalence (RE) measure for owner-occupied housing (OOH) for the Irish housing market. Our data from the official, domestic rental regulator allow us to simultaneously address three significant issues which have arisen in the empirical application of rental equivalent measures. First, we are able to consider the differences in using data on both new and existing rent levels in the analysis, we can also control for other utility costs and finally we are able to estimate a RE measure in the absence of rent controls. To better approximate the OOH structure of the Irish residential market, we also avail of regional data to estimate 32 separate hedonic rent models and use the results to reweight the RE index. We find that our subsequent estimate of RE results in a reduction in the Irish headline rate of consumer price inflation by 0.4 percentage points. Furthermore, we show there are considerable differences in the inflation rate if new relative to existing rents are used in the rental equivalence measures with measures based purely on existing rents biasing downwards both the rental equivalence measure and the overall consumer price index. This suggests that considerable care is required for policymakers in using rental equivalence methods in the presence of data gaps.