Underestimating housing consumption in the national accounts

It's not just household-level data such as the SILC where our approaches to the provision of social housing present measurement issues. In the national accounts, payments such as to HAP landlords are currently counted as a benefit-in-kind for households.  This is in contrast to the benefit-in-cash approach now applied in the SILC.

And, up to 2020, there was a further difference between the micro-data and macro-data approaches to measuring social housing.  In the national accounts an imputed social-transfer-in-kind was previously included for the 130,000 or so households who are local authorities tenants.  This has now been removed.

In the government accounts, on the revenue side, local authorities were treated as generating market output for sale.  For social housing this would be the rent contributions received from tenants plus an imputed amount to bring the value of the output in line with market values, which were based on rents in the private rental sector, using both unregulated and regulated rents.

On the expenditure side, this imputed output was used as a social-transfer-in-kind to households. There would also be expenditure incurred as compensation of employees, intermediate consumption and depreciation or fixed capital formation for the provision of local authority housing. 

This meant that the imputed value was on both sides of the accounts and netted out for the balance.  The  impact of local authority housing on the general government balance was the different between the rent contributions received from tenants and the other expenditure items incurred.

It also meant that the consumption of housing services by local authority tenants was based on the market value of the housing services they used as it is for private tenants (through actual rents paid) and for owner-occupiers(through imputed rents). 

The change introduced this year means that the consumption of housing services of local authority tenants is now treated as non-market output and the value of the consumption of that in the national accounts is based on the costs of providing it (mainly compensation of employees, intermediate consumption and depreciation) rather than an imputed market value. 

It should be recognised that most government-provided services (health, education, policing etc.) are included in national accounts on a cost rather than value basis.  The change to also do so with local authority housing had no net impact on the government’s accounts.  The imputed rents of local authority tenants were removed from both the revenue and expenditure  sides, as imputed market output for revenue and the social-transfer-in-kind for expenditure. 

Indicators like government spending to national income would have been reduced.  And so indeed would national income when the market output based on market value was replaced by non-market output based on costs. 

This change was introduced between the April 2021 Government Finance Statistics and the July 2021 Government Income and Expenditure Accounts.  The July publication included the following note:

Reclassification of local authority housing rent as non-market output

To date the provision of local authority housing was treated as a market output. This meant that the difference between the differential rent paid by the tenant and a market rent was calculated and included as P.11 (market output), with a corresponding imputed expenditure D.632 (social benefit in kind). However, Approved Housing Bodies (AHB) reclassified into the local government sector are considered as non-market producers, with no imputed rent calculation made.

On review, this approach was deemed not appropriate and thus a decision has been made to treat the local authority housing output as non-market. This ensures consistency with AHBs. This determination means that there is no longer an imputed D.632 expenditure related to local authority rent. Local authority rent payments are now recorded as P.131 (incidental sales and fees of non-market establishments). This methodology has been applied from 1995.

There can be lots of reasons for revisions between releases so attributing them solely to a methodological change may not always be correct.  Here are the figures for market and non-market output in the April and July releases.

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For the three years shown (2018 to 2020), the market output of the general government sector was revised down by an average of €1.6 billion – and now takes a value of zero.  For the same years, non-market output was revised up by an average of €1.25 billion.  This suggests that around €350 million of housing consumption may have been “lost” as a result of the change in methodology.

In the greater scheme of things €350 million of consumption may not be that significant, though as a similar treatment is applied for housing by AHBs the underestimate may be slightly larger.  The underestimate is limited to the extent to which the costs of providing LA or AHB  housing is less than the market value of that housing.

In pre-COVID 2019, actual individual consumption was €133 billion, of which the consumption of housing services was €28.5 billion.  The consumption of housing services was made up of:

  • Household Consumption Expenditure
    • Actual rentals for housing €5,393m
    • Imputed rentals for housing €16,459m
    • Maintenance and repair of the dwelling €289m
    • Water supply and miscellaneous services relating to the dwelling €357m
    • Electricity, gas and other fuels €3,091m
  • Government Consumption Expenditure
    • Social transfers-in-kind via market producers €824m
    • Social transfers-in-kind via non-market production by Government €2,087m

A few hundred million extra in there isn’t going to make a huge difference but again maybe points to difficulties in measuring outcomes in relation to housing in Ireland.

There is no doubt that local authorities are not market establishments so deeming the goods and services they provide to be from non-market production has logic to it and imputing values is not an exact process.  However, for housing, a relatively close market comparator can be found, i.e. the private rental sector.  This can be used to give a market value for the output produced.  And up to this year that is what was done for local authority housing in Ireland.

For most EU countries, this isn’t an issue.  Almost all of the consumption of housing is the result of household expenditure.  Government spending does not go to provide housing, at least not directly.  The general government sectors don’t make payments to landlords or provide housing directly.

As the list above shows, in Ireland government consumption expenditure is responsible for around 10 per cent of total consumption of housing.  This figure is by far the largest in the EU.

Consumption of Housing Services from Government Expenditure EU27 2020

For 21 of the EU27, the share of housing consumption due to government expenditure is less than one per cent (and is essentially zero for around half of those).  The closest country to Ireland is France and even then that is at a level that is less than half the outturn for Ireland. 

That is not to say there isn’t public or social housing in most of these countries. There is.  But it is happens in such a way that it is provided by entities that are outside the general government sector.  And they generate their revenues from rents paid by tenants rather than payments by government.  That’s not to say that either approach is right or wrong just that they are different.

The value of housing consumption may be underestimated in other countries to the extent that regulated or controlled rents are used in determining imputed rents for owner occupiers.  In Ireland, for around five per cent of households, the value of their housing consumption is based on the cost of providing those housing services rather than what the tenants might have to pay as private tenants. Again, neither is right or wrong. Just different.

Underestimating housing consumption in the national accounts