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Imputed rent is the rental price an individual would pay for an asset they own. The concept applies to any capital good, but it is most commonly used in housing markets to measure the rent homeowners would pay for a housing unit equivalent to the one they own. Imputing housing rent is necessary to measure economic activity in national accounts. Because asset owners do not pay rent, owners' imputed rent must be measured indirectly.
Imputed housing rent is the economic theory of imputation applied to real estate: that the value is more a matter of what the buyer is willing to pay than the cost the seller incurs to create it. In this case, market rents are used to estimate the value to the property owner. Thus, imputed rent offers a way to compare homeowners' and tenants' economic decisions.
More formally, in owner-occupancy, the landlord–tenant relationship is short-circuited. Consider a model: two people, A and B, each of whom owns property. If A lives in B's property, and B lives in A's, two financial transactions take place: each pays rent to the other. But if A and B are both owner-occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is the imputed rent. Imputed rents can alternatively be understood as returns to investments in assets. On these grounds, imputed rents might be included in disposable income, e.g. when calculating indices of income distribution.
There are two common approaches to estimating imputed rents for housing: the "comparison approach" and the "user cost of capital" approach.
The comparison approach matches rents in tenant-occupied housing units to similar owner-occupied housing units. If the units are identical, the owner-occupant's imputed rent is the cost they avoid in renting the other unit.
In the United States, the Bureau of Labor Statistics uses a version of this approach to estimate changes in the price of owner-occupied housing.[1]
The user cost approach identifies costs unrecoverable by the owner. These can be defined as:
Where i is the interest rate, rp is the property tax rate, m is the cost of maintenance, and d is depreciation. The rent is the sum of these rates multiplied by the price of the house,[2] PH. More detailed user cost models consider differential interest costs for housing debt and owner equity and the tax treatment of housing capital income.[3]
In population datasets like the Cross-National Equivalent File, imputed rent is estimated:
If imputed rent can be applied to housing, it can likewise apply to any good that can be rented, including automobiles and furniture: "In principle, the BEA[clarification needed] should also include imputed rent for things like cars, and even furniture, but compared to housing, it’s such a small part of the economy that it’s not worth the effort."[5]