issue is the _major shortcoming_ in the coverage of its inflation indicator, and pilot studies have been put in place to developing a system of own-occupied housing price indices (Eurostat, 2012). As summarized in Table 1, there is no homogeneity in the way different statistical offices handle owner-occupied housing.

# **3.3 Purchasing Power Parities**

Household dwelling service expenditures are also included in the computation of Purchasing Power Parities (PPP) and their treatment is a major concern particularly when PPPs are used in international poverty comparisons (see Deaton, 2010). PPPs are indicators of price level differences across countries in a given reference period and are produced by the International Comparison Program<sup>34</sup> (ICP, 2013) and by Eurostat-OECD (2012).

The standard procedure recommended for the computation of PPPs is the same as in National Accounts: owner-occupied dwelling are evaluated at the same rents actually paid for identical, or very similar, dwellings in the country. The method used for the imputation is the _stratification_ approach: the housing stock is divided into strata by type, size, quality and location, and each dwelling is evaluated at the average rent in its stratum.

This standard procedure works well in countries where two conditions are met: first, rented dwellings are representative of the stock of dwellings as a whole and second, statistical agencies collect information on rents for different kinds of dwellings in most parts of the country. However, many countries cannot supply information on rents that can be used to calculate PPPs by the standard procedure. This is the problem faced by the ICP for many developing countries with respect to traditional dwellings<sup>_35_</sup> ; ignored when the share of traditional dwellings is lower than 5% (ICP, 2008); or the problem faced by Eurostat-OECD for transition country and new Member States where the rental market is not well developed.

The alternative method for estimating dwelling costs is the _user cost_ approach. It entails estimating imputed rents by summing all the costs that owners incur. These costs are: (i) intermediate consumption; (ii) other taxes on production; (iii) consumption of fixed capital; and (v) real net operating surplus.

Figure 2 shows few rules based on country’s rent market for deciding between standard methods: (i) _development_ : share of rented dwellings in the country (25 percent); (ii) _type_ : rented dwellings are mainly (i.e. more than half) occupied by foreigners or by government or other employees; or (iii) _spatial distribution_ : rented dwellings are not evenly distributed over all parts of the country (see ICP 2011 Guidelines for the User Cost Method to calculate rents for owner occupied housing).

# **3.4 Taxation**

Imputed rents are also relevant in the contest of taxation. There are many arguments in favor of including imputed rent as part of the personal income tax base on equity and efficiency grounds (Andrews et al., 2011, Figari et al., 2012, IMF, 2009, Poterba, 1992 and references therein). These

> 34 The International Comparison Program (ICP) is a worldwide statistical partnership to collect comparative price data and compile detailed expenditure values of countries’ gross domestic products (GDP), and to estimate purchasing power parities (PPPs) of the world’s economies. Using PPPs instead of market exchange rates to convert currencies makes it possible to compare the output of economies and the welfare of their inhabitants in real terms (that is, controlling for differences in price levels).

> 35 Traditional dwellings are generally built by family members. The walls are made of less durable materials such as dried clay, sun dried bricks, bamboo or latticework, and the roofs are made from reeds, straw or palm fronds. Traditional dwellings are generally located in rural areas and the families that occupy them are most likely to be engaged in agriculture. (ICP, 2008)

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