A golden age for macro economic statistics. Part 1: homestead rents or house rents?

by
Merijn T. Knibbe
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The post 2009 decade will stand out as a golden age for economic statistics. I do not mean econometric analysis, I mean statistics like asset prices, rents or estimates of inequality and household income. The empirical basis for a truly scientific macro economics has finally become less shaky. On an irregular basis, I will publish some posts on some of the treasure troves which have become available.

Here, already one example, based on the recent PhD of Matthijs Korevaar., ”Financial lessons from the long history of housing markets”. Finally a long term series of one of the most important price series there is: rents. How could we ever have done proper macro without it!

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Why is this important? Economists like to argue using stylized facts which are based upon stylized concepts. One of these: economic growth. Economic growth is calculated by dividing nominal production by the price level. The price level is, in my opinion, a useful concept. But it’s also complex and ambiguous. A meaningful interpretation of changes in the price level (and, hence, of economic growth) should take account of these complexities and ambiguities. One of the complexities: should asset prices be included in the consumer price level? The general answer is: no. House rents are, however, included. But what about the next situation: in most cases, the land underlying houses is owned by the house owner. And, hence, included in the market price of the house (the location value might even be the largest part of this price!). But more often than you might think, the land underlying houses is not owned by the owner of the building. Amsterdam is a prime example. Should the rent which the owners of the buildings pay for the right to use this land be included in the consumer price index?

I won’t answer that particular question here. But to be able to answer it, economists need information on rents actually paid. And not just recent information but also historical information, about rents in relation to different institutional arrangements, rents in relation to changes in levels and sources of income, rents in relation to infrastructural developments and whatever. Such information gives you a better perspective on the nature of rents and of the economy – the ‘erfpacht’ (hereditary rent) in Amsterdam is, today, a somewhat anomalous institution. Only a few centuries ago, it was however very common that the land in cities was owned by charities and the church or the nobility while buildings were owned by the inhabitants of these houses (and, hey, how much of London is owned by the royal family!). Cities were, in a sense, a giant trailer park. But such historical information also enables economists to make more meaningful estimates of aspects like the price and income elasticity of, in this case, rents (yes, rents can go down, too…). Or, more tricky, of the influence of the shift of land ownership from other owners to the owners of buildings on asset prices and rents and the possible consequences of nationalizing (part of) the ownership rights of land. So, aside from the development of (real) rents which the series above shows and which are interesting in their own right using a long term series on this variable forces the macro economists to thing about the very concepts used – and the historical changes which influence these concepts. It’s well known that the level of prices change – but prices (money per unit of ‘something’) themselves change, too, as ‘something’ also changes. Another example: quality of houses improved quite a bit (just think of sewers, glass windscreens and whatever). Prices do reflect this, too (this is discussed in the Ph. D of Korevaar).

Many of such series have recently become available. Together, these will change macro.