Rental equivalence, owner-occupied housing, and inflation measurement: Microlevel evidence from Ireland

We use unique supervisory property-level rental data to estimate a rental equivalence (RE) measure for owner-occupied housing (OOH) for Ireland. Our data from the official, domestic rental regulator allow us to simultaneously address three issues that have arisen in the empirical application of rental equivalent measures. First, we can differentiate between new and existing rent levels in the analysis; second, we can control for other utility costs; and finally, we are able to estimate an RE measure in the absence of rent controls. To better approximate the OOH structure of the Irish residential market, we estimate 32 separate regional hedonic rent models and use the results to reweight the RE index. We find that our subsequent estimate of RE results in a reduction in the Irish headline rate of consumer price inflation by 0.4 percentage points. Furthermore, we show that there are considerable differences in the inflation rate if new relative to existing rents are used in the RE measures with measures based purely on existing rents biasing downward both the RE measure and the overall consumer price index. This suggests that considerable care is required for policymakers in using RE methods in the presence of data gaps.