Since 2000, housing prices in China have generally risen faster than other consumer goods, yet the Consumer Price Index (CPI) inflation rate does not appear to fully capture the impact of home purchases on living costs. Excluding housing prices from the CPI may distort the inflation indicator and undermine the precision of macroeconomic policy. This paper proposes a “home purchase cost approach”, which interprets owner-occupied housing expenditure as the opportunity cost of acquiring housing services through homeownership. An overlapping generations (OLG) model that incorporates various methods of measuring owner-occupied housing consumption into a unified theoretical framework is developed. Using this approach, we recalculate the owner-occupied housing expenditure and price for urban households in China and adjust the urban CPI accordingly. The findings show that the home purchase cost approach effectively incorporates housing price information while exhibiting favorable statistical properties, outperforming the current equivalent rent method. It more accurately reflects living costs, particularly when housing prices rise rapidly while rents remain stable. Between 2015 and 2021, this approach implies that owner-occupied housing expenditures accounted for 16.1% of the urban consumption basket, 7 percentage points higher than the existing method; the annual inflation rate of owner-occupied housing prices was 6.7%(5.4 percentage points higher); and the urban CPI annual inflation rate was 2.7%(0.7 percentage points higher).