# **1 Introduction**

Desirably, all goods and services should be included as part of the welfare aggregate, which can be thought of as an empirical approximation to the indirect utility function or the money-metric measure of welfare (Deaton and Grosh, 2000). Only a comprehensive welfare aggregate can measure people’s living standards accurately. In principle, households purchase or produce accommodation for themselves just as they purchase or make food or clothing (Malpezzi, 2000). Nevertheless, practitioners often overlook housing when estimating people’s welfare measure using household survey data.

The importance of housing as part of the consumption aggregate has been well acknowledged in the literature for decades.<sup>2</sup> It is often the dominant consumption good for most households (see Norris and Pendakur, 2013). Both in developing and developed countries, for instance, housing represents between 14 and almost 25 percent of the total households’ adjusted disposable income in 2012.<sup>3</sup> Additionally, evidence suggests that the share of housing consumption increases with levels of aggregate welfare when comparing across countries (see Blades, 2009).<sup>4</sup> Therefore, it is relevant to include housing expenditures when constructing the consumption aggregate for making more reasonable interhousehold as well as international comparisons of economic well-being (Gaerner and Short, 2009).

The utility generated by housing is the value of the flow of services that the household receives from occupying its dwelling over the period of analysis rather than the expenditure for purchasing the dwelling itself. As a major durable good, a house purchase is a large and rare expenditure, thus it should never be included in the consumption aggregate. To measure this flow, the rent paid seems to be the natural choice to be included in the consumption aggregate. In the case where rental markets work perfectly and all households rent their dwellings, then market rents are a good approximation of dwelling services.

However, many households own the dwelling in which they live. For example, in 2011, homeownership in European countries ranged from 39 percent in Switzerland to above 90 percent in Romania.<sup>5</sup> Similarly, in Latin American countries the share goes from 44 percent in Colombia in 2012 to more than 80 percent in the case of Nicaragua in 2009.<sup>6</sup> Additionally, some tenant households receive housing free of charge or at subsidized rates by their employer, friends, relatives or government. In some European countries, such as Austria and Cyprus, social rents account for more than 20 percent of total households while in others, like Sweden and Denmark, they are non-existent (authors’ results on EUSilc Dataset). Therefore, the main problem when constructing the consumption aggregate to measure individuals’ well-being consists in assigning a value to the flow of the dwelling for homeowners and nonmarket tenants.

Over the last decades several estimation techniques have been implemented by practitioners covering from very simple to sophisticated approaches, which depend mainly on the data collected from household surveys or other external sources. These studies have produced a substantial amount of

> 2 See for instance: UN (1977); EC No. 1980/2003; Yates (1994); Citro and Michael (1995); Deaton and Grosh (2000); Malpezzi (2000); Canberra Group (2001); Gaerner and Short (2001); Stiglitz, Sen and Fitussi (2009); Gaerner and Betson (2010); Norris and Pendakur (2013) and OECD (2013).

> 3 Based on OECD (2014), National Accounts at a Glance.

> 4 Performing an updated correlation between housing shares and GDP per capita including a list of 38 countries from all continents; we found a significant and positive correlation, similar as previous studies (see Blades, 2009). Results are available upon request.

> 5 Authors’ calculation based on EU-Silc database. See also Andrews et.al (2011).

> 6 SEDLAC (Socio Economic Database for Latin America and the Caribbean) database.

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