The ECB is considering counting owner-occupied housing in its calculation of the consumer price index (CPI):
Consumer-price indices are meant to reflect the cost of typical baskets of goods and services. The euro area’s have a big omission. They capture rents paid by tenants, but not the costs of buying and owning property—even though two-thirds of people in the zone own their homes. As Benoît Cœuré, who until recently sat on the ecb’s board, pointed out, the bank’s chosen measure “captures only marginally the largest single lifetime expenditure of households”.
In fact, euro-area statisticians do calculate the cost of buying and owning a home. Adding it to price indices could raise measured inflation by 0.2-0.3 percentage points, notes Davide Oneglia of ts Lombard, an investment-research firm. That is nothing to sneeze at when official inflation is only 1.3%…
But the euro area’s version has its problems. It does not fully strip out land prices (roughly, the asset-price part) from those of buildings (the consumption bit). And unlike timely, monthly inflation figures, it appears only quarterly and after a long delay. In 2018 the European Commission and the ecb decided to leave it out of consumer prices.
In 2017, CBA senior economist, Gareth Aird, explained the impact of including housing in Australia’s CPI:
According to the ABS, land prices are excluded from the CPI because they don’t fit the definition of a consumption good. The ABS states that:
CPI only includes goods and services that are purchased by households for consumption. A consumption good or service is one from which households directly derive utility or satisfaction. Any business – related purchases by households are excluded from the basket, as are those items that have a significant savings or investment component, such as land and capital goods.
Here one could reasonably argue that purchasing a home to live in has aspects of both investment and consumption as utility and satisfaction are derived from home ownership.
We continue: the ABS also states that, “the principal purpose of the CPI has been to measure inflation faced by households to support the operation of macroeconomic policy decision making”.
Our emphasis is on “inflation faced by households” because clearly based on the exclusion of land prices in the CPI the ABS does not consider dwelling price rises to be “inflation faced by households”. That is true for households who own a home. But for aspiring home owners dwelling prices are part of the inflation that they face. Their exclusion from the CPI therefore makes it an inaccurate measure of the type of living costs that they face.
The RBA supports the exclusion of land prices in the CPI and according to the central bank, “the purchase of existing housing represents a transfer within the household sector (which means that there is zero net expenditure by the household sector in these transactions)”. Very true. But then rent is also effectively a transfer within the household sector from tenant to landlord and rent is included in the CPI…
The inclusion of dwelling prices in CPIH, even just accounting for 10% of the basket, pushes up the annual change significantly since 1998. The annual change in CPIH is, on average, 55bps higher than the annual change in CPI (chart 4).
The point of this exercise is to highlight how the exclusion of dwelling prices from the CPI has masked the uplift in the cost of living for households who don’t own a dwelling but aspire to purchase one. For them, the cost of living has risen by more than is implied by the CPI. This is, to an extent, very much a question of generational equity.
…younger people, who are less likely to own a dwelling, have faced a greater deterioration in real wages than is implied by deflating nominal wages by the CPI. This is because the single biggest purchase they are yet to make is not included in the CPI. And it has, of course, been rising much, much quicker than the CPI itself.
Thus, the CPI is a poor barometer of changes in the cost of living for people who don’t own a dwelling and aspire to purchase one. Moreover, CPI would look very different in Australia if the complete cost of a dwelling was included.