In previous posts I have criticised housing statistics produced by industry and the NFP sector. In this post I want to question the official housing statistics in the Consumer Price Index (CPI), which it turns out are not particularly useful in tracking housing costs. This is true even though the CPI is includes specific data series on housing and rent statistics and is widely used for indexing and updating less frequent housing data.
CPI and Home Owners
The first thing to note about the CPI housing data is that, while it includes an item for the house purchase prices, the actual CPI item is “New dwelling purchase by owner-occupiers”. In any given period, relatively few people purchase a house, and those purchasing a new dwelling is an even smaller subset, so the CPI figure here may not reflect prices for many home owners. But more importantly, the CPI figure for new dwelling purchases does not include land prices. In that sense, it measures the increase in the cost of building a new dwelling – which may be very different from changes in the market price of housing (particularly where there is significant speculation-based inflation).
Further, while the CPI includes this (limited) house sale price measure, it does not include mortgage payments (as they are not prices). Yet mortgage payments impact on far more weekly household budgets then house sale prices, and it has been mortgage increases which have driven much of what we now (mistakenly) call a “cost of living crisis”.
The absence of mortgage payments in the CPI is not the fault of the ABS or a problem in the CPI itself. It is a problem in the way the data is sometimes used. The CPI is about measuring price changes experienced by households – a measure of price inflation, rather than the cost of living. The inflation measure is important as a tool of economic management because of the (theoretical) macro-economic relation between production, money, aggregate price levels and jobs. It is particular measure for a particular purpose. In that sense, the statistical silliness is not in the CPI, but in its misuse as a cost of living measure.
The ABS recognises this and produces (a week after the CPI) a series of Selected Living Cost Indexes which include mortgage payments and are a much better reflection of the impact of housing costs on households. However, these living cost indexes are mostly ignored by the media (presumably out of ignorance) and economists (because their focus is on model graphs rather than households). Further, the Living Cost Indexes are produced for different household types (based on income-source) and don’t give a single headline figure which can be used conveniently for indexation in the way that CPI is used.
The bottom line is that using the CPI data is not useful in tracking housing prices.
CPI and Rent Prices
And it turns out that that the CPI rent data is not much more use in relation to rent. Unlike the commercial “asking rent” data discussed in my earlier post, the CPI does at least cover increases in existing rents not just new tenancies. However, the CPI significantly underestimates the increases in the market price of rentals (and so is less than helpful for indexing changes to other rent data). There are several reasons for this.
The CPI rent category includes public and community housing rents, which are income rather than market based. In South Australia, this accounts for around one-in-five rentals, but if these (predominantly Centrelink) incomes go up by less than private rents – as is likely in a tight rental market – the smaller increases in public housing rents will lower the overall CPI for rent.
Further, for those in the private rental market the data, the CPI is adjusted for increases in Commonwealth Rent Assistance (because the CPI is designed to capture the price paid by the consumer not the price charged in the market). Given that CRA is indexed to the general CPI, then the rent price increases recorded in the CPI for tenants that receive CRA are in effect “above inflation” increases, rather than market price increases.
This CRA adjustment to CPI is even more important because in recent years there have been two significant “above indexation” increases in the CRA. These were welcome increases for those struggling to pay increasing rents, but given that more than half of all tenants receive CRA it means that the CPI rent data further underestimates the actual rent price increases in the market. According to the ABS, without the changes to CRA, rents would have increased by 7.8% over the 12 months to the December 2024 quarter – as opposed to the 6.4% recorded in the CPI.
The result is that there are really three different index series required to track rent increases – one for public housing, one for tenants getting CRA, and one for unassisted private renters. The inclusion of the first two series into the existing CPI rent data means that the summary figure underestimates the rent increases for the third group (and the market price). In turn, this means that any indexing of rent data based on “CPI rents” will underestimate the increases – which is a particular problem as this is a typical way to update census data (which is the main data set on existing rents).
The graph below shows the difference in price increases between the SA government rental bond data (for new tenancies) and CPI rent for Adelaide.
Given my previous critique of the limitations of rental bond data, I suspect the average rent increase is somewhere between these lines, which brings us back to where I started this series on silly housing statistics: there is actually no data that shows average rents in capital cities, and in this case, no way to unproblematically track or index rent increases.