Owner’s equivalent rent (O.E.R.) has been a controversial topic among economists, with many criticizing it for being slow-moving and using convoluted statistical methods. Detractors argue that it does not accurately reflect current economic conditions and is giving a false impression of inflation. As a result, O.E.R. has become a major player in America’s inflationary tale, impacting the ability to return to normal price increases. Housing inflation has been stubbornly high over the past year, leading to the Federal Reserve maintaining high interest rates to control prices by slowing the economy.
Despite the criticism, not all economists believe O.E.R. is the problem. Some view it as a valid and reasonable way to measure an important aspect of the consumer experience. Housing inflation is a significant contributor to overall inflation, with the Consumer Price Index heavily weighted towards housing costs. To measure housing inflation, the government uses a two-step process involving survey questions about rental prices and actual rental data collection. By estimating how much it would cost to rent owned housing, O.E.R. aims to capture the “consumption value” of housing rather than just price appreciation.
Economists have been anticipating a reduction in housing-fueled inflation, as rent increases on newly leased properties have cooled in recent years. However, the process of rent resets for existing tenants has been slower than expected, delaying the convergence between new and existing rent inflation. While forecasters still believe this pass-through will occur, there is uncertainty about the timeline and extent of the adjustment. Some measures show signs of renewed strength in new apartment rents, raising concerns about a potential resurgence in housing inflation.
Some economists argue that the current housing inflation is driven by catch-up inflation, meaning it does not reflect ongoing market conditions. While some European countries exclude owner-occupied housing from their main inflation measure, others defend O.E.R. as an important metric. Moving away from O.E.R. could undermine trust in the Federal Reserve’s commitment to fighting inflation, according to proponents. O.E.R. attempts to capture the changing value of housing over time, which influences economic decisions such as relocation costs and renting expenses. Despite its complexities, O.E.R. plays a vital role in understanding the economic impact of housing consumption.
