2003) as well as in South Africa’s 1993 LSMS (see Deaton and Zaidi, 2002). In the latter, instead of running a hedonic model, the local median of rent-to-property values in the same location was used to impute rent for home-owners.<sup>17</sup>

# **2.2.2 The User-Cost Approach**

While the rent-to-value approach endogenously defines the return rate that transforms a dwelling’s value into the flow of services, the user-cost approach needs an exogenous estimate of the capitalization cost. To implement this method, two sets of information are needed: (i) the rate of return for housing and (ii) information on operating costs related to home ownership such as maintenance, repairs, rates, insurance, mortgage interests payments, and expected appreciation of the property. The user cost related to the dwelling type _h_ at time _t_ ( U ) is then defined in equation (15): h,tt U � (15) h,tt h,tt tt h,tt where is the nominal interest rate or the real mortgage interest rate or the opportunity cost of having = VV �ee + γγ−EEππ invested in buying a home instead of investing in other financial activities; is the sum of depreciation, tt maintenance and repair, and insurance; and ee is the expected appreciation of the property (or inflation). As Diewert (2009) points out, � may be interpreted as the real interest rate at time γγ h,tt _t_ . EEππ tt h,tt �ee −EEππ Yates (1994) applies this approach to the 1988/89 Australian Household Expenditure Survey (AHES), using subjective assessment of dwelling value and operating cost from the AHES and computing the return rate for housing by comparing the individual estimates with the imputed rent found in the Australian National Accounts. Other examples of countries adopting the user cost approach are Estonia, Czech Republic, Island, Slovak Republic and Sweden for the European Community Survey on Income and Living Conditions (see Törmälehto and Sauli, 2013). Unfortunately, there are no details available about the rent imputation process implemented in these countries.

Frequently, a simplified version of the user-cost approach is used by fixing an arbitrary implicit rate of return on housing equity. This equals a sage private market (long-run) rate of return. Smeeding et al. (1993) use a return rate of 2 percent and add it to each country’s inflation level. The resulting rate is multiplied by home equity to estimate imputed rent. This is also the method followed by Frick and Grabka (2003), who adopted a 6 percent nominal interest rate and a 2 percent real interest rate. Deaton h,tt and Zaidi (2002) apply the user-cost approach in Vietnam. The value of housing consumption is 3 VV percent of the current value of the house which comes from a regression of housing value on various housing characteristics.

Lastly, Verbugge (2008) and Garner and Verbrugge (2009) highlight the notable divergence between actual rents and user costs for the case of the United States, concluding that the rental equivalence method should be the preferred choice for official price statistics. Other difficulties in applying the user cost method entails making reasonable assumptions on the proper interest rate, depreciation rate, inflation rate, as well as having precise information on the purchase prices for the dwellings (see ILO, 2004 for an exahustive review).

> 17 In cases where the property value was also missing, it was replaced by the number of rooms of the dwelling times the median property value per room in each locality Deaton and Zaidi (2002).

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