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Special Issues in Capital Measurement ISBN 978-92-64-02563-9 Measuring Capital OECD MANUAL 2009 © OECD 2009 Chapter 18 Special Issues in Capital Measurement 153 II.18. SPECIAL ISSUES IN CAPITAL MEASUREMENT 18.1. Land and dwellings The SNA, in its asset classification, distinguishes between dwellings and other buildings and structures as part of produced assets and land as a non-produced asset. Other buildings and structures are, in turn broken down into non-residential buildings, other structures and land improvement. Although land is a non-produced asset, it is well established in the economic literature as a factor of production and therefore as an asset that provides a flow of capital services into production. “It is not only produced assets which are used in production. The first and oldest recognised form of non-produced capital is land. Land is special in that under good management, the value is assumed to remain constant from year to year except for the effects of inflation in land prices. That is to say, there is no depreciation of land and all the contribution to production can be regarded as income. […] It may seem slightly odd to think of a non-produced asset contributing a “service” since in national accounts services are always produced. This is simply a reflection of the words chosen by economists to describe the contribution of capital to production without connecting the word ‘service’ to the specific interpretation given to it in the SNA. Similarly one may hear compensation of employees described as the cost of labour services.” (2008 SNA, forthcoming). In the discussion about capital measurement, land and dwellings deserve special attention because: ● Special measurement problems arise because it is often not possible to separate the value of land from the value of structures on it. However, such a separation is needed because structures depreciate but land does not; ● Residential and non-residential structures have long service lives and the corresponding investment series needed to implement the perpetual inventory method may not be available. Stocks of structures may then have to be estimated on the basis of physical information on the stock of dwellings, land registers etc. which involves additional statistical uncertainty, in particular when it comes to valuing the stock of land and buildings; ● Markets of land may be subject to bubbles in the price of assets. Such phenomena are at odds with the relatively simple equilibrium theory underlying the capital services model and may therefore invalidate standard methods to estimate the value and the volume of capital services for these assets; ● Owner-occupied housing is an important non-market activity of household production. Capital services and user cost measures are one way of estimating the value of this production and can significantly alter the level and growth rates of GDP; ● Price indices for residential and non-residential houses are notoriously difficult to develop and yet much of the quality of valuation of capital services from land and structures depends on the quality of available price indices; 154 MEASURING CAPITAL: OECD MANUAL 2009 – ISBN 978-92-64-02563-9 – © OECD 2009 II.18. SPECIAL ISSUES IN CAPITAL MEASUREMENT ● More generally, the measurement of capital services from land and structures affects three singularly For practical purposes, only land under structures and buildings important economic variables: GDP, capital input and and cultivated land should be the consumer price index and a consistent approach considered a source of capital services. towards these measures is desirable. 18.1.1. Measuring and valuing the stock of land Land is not a homogenous asset and land prices can develop at very different rates, depending on the use of land and depending on geographical location. The classification for non-produced asset distinguishes between four types of land: ● Natural land under buildings and structures and associated surface water; ● Natural land under cultivation and associated surface water; ● Natural recreational land and associated surface water; ● Other natural land and associated surface water. For many statistical purposes it will be useful to keep these categories apart because price developments will typically differ between the categories and because not all types of land are necessarily sources of capital services. It would seem clear that land under buildings and structures and land under cultivation are sources of capital services – there is an apparent input into production as defined in the national accounts. The extent to which this applies to recreational and other natural land is not clear. For most practical purposes it would thus appear that only land under building and structures and cultivated land should be considered sources of capital services. Land registers provide a natural starting point to measure the quantities of different land categories. A much more difficult issue is the valuation of land and construction of a price index for each type of land. For residential land, one way of approaching valuation is by using information on sales of dwellings (comprising both structures and land beneath) with information on structures only to derive land values residually (see box for an example from Australia). A similar, residual approach towards estimating a time series of the price of residential land has been adopted by Davis and Heathcote (2004) for the United States. Information on the price and quantity of structures and buildings without land is often more readily available when data on the stock of dwellings uses the perpetual inventory method with investment series for structures and buildings from the national accounts. Investment surveys on construction permit relatively easy collection of information on the value of structures excluding land. Valuing stocks of land is also problematic when land prices vary significantly between locations and applying an ‘average’ price of land seems liable to significant bias. A first step towards capturing regional differences in land prices is a minimum stratification to differentiate between areas with the largest differences in land prices, such as urban versus rural areas. Blades (2006) points out that estimates of the average ratio of the value of land to the average value of dwellings (excluding land) can sometimes be obtained from sources such as real estate agents or official records of land values. Some countries may be able to borrow ratios estimated from neighbouring countries which have similar population densities and housing structures. MEASURING CAPITAL: OECD MANUAL 2009 – ISBN 978-92-64-02563-9 – © OECD 2009 155 II.18. SPECIAL ISSUES IN CAPITAL MEASUREMENT Box 18.1. Valuing land and dwellings owned by households in Australia A new method put in place for the valuation of land and dwellings owned by Australian households started out with a comparison of different sources for the combined value of land and dwellings. For this purpose, ABS compared three sources in terms of the overall and the mean dwelling value for 2004: ● The Survey of Income and Housing with household reports on the value of properties, comprising both structures and land (mean dwelling value $ 299 000); ● Estimates by the Reserve Bank of Australia, which are derived by applying average sales prices from private contractors to the number of dwellings as registered in the ABS Census of Population and Housing (mean dwelling value $ 335 000); ● Estimates from the national accounts with detailed information on the stock of housing from the 1991 Census of Population and Houses (mean dwelling value $ 349 000). The comparison showed that the two independent estimates from the Reserve Bank of Australia and from the Survey of Income and Housing are broadly in line with each other. ABS then adopted the Reserve Bank estimate of the combined value of residential land and dwellings. Estimates of the value of land held by sectors other than the household sector are estimated residually by the ABS by deducting the estimate of residential land and dwellings held by households from the aggregate estimate of the value of residential land and dwellings estimated by the Reserve Bank. This new method has resulted in a revision of the level and sector allocation of the value of land and dwellings as shown in the table below. All numbers are in billions of Australian dollars and relate to June 2005. Non-financial corp. Financial corp. Government Households Dwellings old estimate 44.6 -- 3.7 1038.9 new estimate 44.1 -- 3.6 1038.5 Residential land old estimate 83.4 -- -- 1437.7 new estimate 179.1 -- 10.8 1683.0 Commercial land old estimate 32.4 22.3 -- 138.7 new estimate 138.4 24.4 -- 40.7 Rural and other land old estimate 16.7 -- 133.2 192.2 new estimate 16.6 -- 133.2 191.4 Source: Australian Bureau of Statistics (2006). 18.1.2. User costs of land Having established that land is a source of capital services, the question arises how to go about measuring the user costs for land and the structures on it. We shall restrict the discussion to residential dwellings and the associated land because most of the points carry over to non-residential structures and the land underneath as well as to land under cultivation. Also, residential dwellings play an important role by their sheer size but also because owner-occupied dwellings have a double nature: they constitute a source of capital 156 MEASURING CAPITAL: OECD MANUAL 2009 – ISBN 978-92-64-02563-9 – © OECD 2009 II.18. SPECIAL ISSUES IN CAPITAL MEASUREMENT services and they are the most important occurrence of production by households. This raises an issue of consistency when measures of capital services on the input side of the economy are based on a user cost approach and when the output of dwelling services provided by households is estimated with a different approach, such as the rental equivalent approach, more of which below.
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