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 includes specific data on housing and rent 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 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 far more on weekly household budgets than 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 each quarterly CPI data release) 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 models rather than real 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). The rent increases recorded in the CPI for tenants receiving CRA are therefore less than the 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 underestimated 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.

This is particularly important because it means that it is problematic to use the CPI to update other intermittent rent data. The graph below shows the census data on median weekly rent for the Greater Adelaide area. The census is one of the few sources which captures all rents paid (rather than just new rental agreements), and if the CPI accurately reflected increases in rent prices, the line would be a smooth increase from one census to the next. However, the sharp increases at each census point show that the actual rents actually increased quicker than CPI for rent.

Conclusion

The result of all of the above is that, if we want to focus on all rents – rather than just the prices in new tenancy agreements – then we would need three different index series: one for public housing, one for tenants getting CRA, and one for unassisted private renters. While the CPI provides a weighted average index of these, it does not accurately reflect what is happening for each particular group. It exaggerates increases in public housing rents (if market rents are going up faster than income), but underestimates rent increases in the market overall (as shown above).

However, this shortcoming does not legitimise or provide a reason to use the “asking rent” data or the bond data for new tenancies as surrogates for actual rents or for measuring rent increases. As the graph below shows, there is a big difference between the rent increases in those data sets and the CPI. I suspect the real average rent increase is somewhere between these lines .

This 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. Yet we can’t just abandon the data, the housing crisis is too important. But we can try to understand and qualify the data to avoid using silly housing statistics.