In practice, housing costs for owner occupants based on the acquisition approach will move closely in line with construction and maintenance costs. They would probably be given a somewhat lower weight in an overall index over time than imputed rent in the CPI in Norway today. The chart shows developments in the construction cost index and developments in imputed rent in the CPI, which is based on developments in the rental market. The two indices have risen at about the same rate in recent years, but have diverged since summer 2006. Higher prices for both labour and building materials have pushed up the rise in construction costs. In August 2007, the 12-month rate of increase in construction costs was 7.9 per cent, while the 12-month rate of increase in imputed rent was 1.5 per cent. 6  See Eiglsperger, M. (2006) The treatment of owner-occupied housing in the harmonised index of consumer prices. IFC Bulletin 24, 68-79. 8  BIS Review 102/2007  A change from imputed rent to the acquisition approach may change the path for the CPI over the business cycle. While rents probably react with a lag, movements in the rate of increase in construction costs will be more coincident with cyclical developments. Prices for clothing can also be difficult to calculate. As measured by the CPI, clothing prices in Norway have fallen markedly over the past few years. This may reflect the removal of import quotas, reduced tariff rates, a shift in imports towards Chinese goods and improved efficiency in retail industry.
Large volumes of lending are being used to finance consumption and investment, among other things in housing. At the same time, the many positive supply-side conditions – with strong growth in real income in the household sector and in private and public enterprises – have probably made a more direct contribution to the sharp rise in house prices and debt accumulation. When capital – and increasingly labour as well – flows more freely across borders, prices for these factors of production will to a greater extent reflect global growth and competitive conditions. On the other hand, the price of fixed capital, such as property, will be influenced by expected future income in different countries. Even if construction costs have increased somewhat – and accelerated to some extent this year – it is primarily the price of land that has increased in Norway. Land is valued at a considerably higher level, while the price of the dwelling itself has not increased to the same extent. Norway is now reaping the gains of the strong expansion of Asian countries and changes in the division of labour between countries. The improvement in Norway’s term of trade, coupled with high growth in productivity, has delivered very strong, positive income shocks to the Norwegian economy. It follows that land prices will rise at a faster pace than other prices. This is a real economic effect, which monetary policy cannot eliminate.