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An assessment of mortgage interest inflation measurement bias in the UK 

Author: Damian Ward a
Affiliation:   a Bradford University School of Management, University of Bradford, Bradford, UK
DOI: 10.1080/02692170802005405
Publication Frequency: 6 issues per year
Published in: journal International Review of Applied Economics, Volume 22, Issue 3 May 2008 , pages 373 - 386
Formats available: HTML (English) : PDF (English)
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Abstract

This article recognizes the highly differentiated nature of UK mortgages. Applying hedonic pricing models in the generation of interest quality adjusted indices this study would suggest the need for a 0.24 percentage point increase in the retail price index (RPI) (which, at an average RPI of 3%, represents a measurement error of 9%). Moreover, this study finds that lenders tend to restrain increases in observable initial interest rates, but more than recoup this restraint through quality adjustments. These findings question the practice of removing mortgage interest repayments from macroeconomic inflationary target measures. This indicates the need to recognize the indirect inflationary impact of base rate rises on the price of highly differentiated debt based products.
Keywords: hedonic pricing; mortgage products; inflation measurement; UK
JEL classifications: E31; G21
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