The imputed rent is to darn high! More on Piketty

Quite some people who are reading Piketty are somewhat puzzled by ‘r’, the return on capital. How can r keep increasing when the amount of capital, as a % of GDP, doubles?! What is ‘r’ anyway? Piketty is actually quite clear on ‘r’: he uses the definitions and data from the national accounts. One of the constituent parts of ‘r’ are house rents: actual rents as well as imputed rents. Imputed rents are an imputed stream of income of owner occupants of houses and are supposed to be as high for these owners as actual rents for comparable houses (becomes a little difficult for houses of the top 0,1%, but for most owner occupied houses this procedure is reasonable). And when we look at imputed rent as a % of total household expenditure we see that this did increase quite a lot (should have calculated this as a part of disposable income or GDP but that required a whole lot of additional calculations while these data were directly available on the Eurostat site). Even for neoclassical economists, who do not believe that house prices are house prices and calculate the value of housing capital as the discounted value of the stream of rents (look here, in french, via Marginal Revolution) this will mean that the amount of capital increases, compared with household expenditure (and a fortiori when the ECB lowers interest rates, i.e. the discount factor). I do admit that it is troublesome to mark houses to market when they are not on the market. But discounting a stream of income in an uncertain world is troublesome, too, and it does not make any sense to calculate the extra ordinary rise of house prices in many countries away! Anyway – the imputed rents are too darn high! Which explains part of the conundrum.

Update: I forgot to state that quite a part of the imputed rent gain of owner occupiers is of course siphoned off by the banks which provided mortgages with newly minted money

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