CPI distorted downwards by faulty rents calculations

Kiryat Ono apartments
Kiryat Ono apartments

Likely results include a reversal of Israel's negative inflation in 2014, 2015, and 2016 and international embarrassment for the country.

A major mistake in calculating the Central Bureau of Statistics' rental index has distorted the Consumer Price Index for years, leading to understating of inflation in Israel. The exposure of the error, which is now being checked, is likely to cause a retroactive correction in the indices.

During discussions by the advisory committee established by the government to assess the real estate price indices, the committee learned that the Central Bureau of Statistics' rent index, which makes up 5.7% of the Consumer Price Index, has for years included an amateurish structural error that led to a substantial downward bias in the rental index. Correcting the error will retroactively raise the Consumer Price Index and alter the inflation calculations in recent years. Likely results include a reversal of Israel's negative inflation in 2014, 2015, and 2016 and international embarrassment for Israel.

According to an assessment presented to the committee by senior economist Raz Dror, who worked on the National Economic Council in the Prime Minister's Office until recently, a gap has been created between the two types of measurement since 2008. According to the new calculations, the rent index has risen 65% since 2008, compared with 40% according to the old rent index, meaning that actual overall inflation was more than 1% higher than reported.

Doron Sayag, the coordinator of the committee on behalf of the Central Bureau of Statistics, told "Globes" that the Central Bureau of Statistics had begun checking for "most accurate and better estimation." Sayag said, "The 25% gap found by Raz Dror was not calculated by the Central Bureau of Statistics, and we are now doing a better check. As of now, this is an initial assessment, but it appears to us that the gap that will eventually be found between the reported index and the new one will be lower." In any case, also because of difficulty in finding data retroactively, the Central Bureau of Statistics is planning on publishing retroactively corrected figures only starting in 2010.

The rent index, which is published each month as part of the publication of the Consumer Price Index, shows the change in rents, compared with the preceding month, based on a telephone survey of renters. The survey covers 14,000 leases each year.

It turns out, however, that as soon as a renter enters the database, he or she is sampled every time his or her lease expires, but monitoring of the rent is halted when the renter leaves the apartment. According to a report by the advisory committee, this decision resulted from "technical reasons, due to difficulty in obtaining particulars of the new tenant." In practice, it is clear to anyone familiar with the housing market that an exchange of tenants frequently provides an opportunity for raising rents, without this having any effect on the rent index. According to the report, a check conducted by the Central Bureau of Statistics in the past found that tenants who changed apartments paid an average of 6.6% more than tenants who stayed in their apartments.

The committee explicitly states that since the apartments were removed from the index when the tenants changed, the figures were clearly biased. "In particular, in a market with an upward price trend, a downward bias in the rent index is likely, since some of the tenants move to another apartment due to a demand for higher rent," committee members wrote. "Alternatively, in a market with a downward price trend, the bias is likely to be upward, because the lessor is likely to lower rent on the apartment when tenants change in order to avoid leaving the apartment empty."

In accordance with the committee's recommendation, the figures will soon be retroactively corrected, and from now on, the apartment will remain in the database after the tenant is replaced. In order to reduce bias, the Central Bureau of Statistics has obtained legal authority to demand that a tenant who left his apartment in the sample provide them with the new tenant's particulars. Furthermore, the Central Bureau of Statistics is also taking action to obtain figures from Israel Electric Corporation (IEC) (TASE: ELEC.B22) in order to verify that every change in tenants is entered into the database.

The housing index (sales) has not been part of the Consumer Price Index since 1999; it was replaced by the change in the rent index. The Central Bureau of Statistics emphasizes that the bias did not affect all the elements in rent, which accounts for 24% of the Consumer Price Index; it only affects the 5% of the index for which the biased calculation was used (the supplementary calculation is based on the average prices).

As recommended by the committee, starting this April, the rent index will also be published separately for each district.

Published by Globes [online], Israel Business News - www.globes-online.com - on January 29, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Kiryat Ono apartments
Kiryat Ono apartments
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