Governments should sort out the inefficiencies in today’s housing markets, rather than make them somebody else’s problem
is systematically understated. New Zealand’s government has asked the central bank to explain the impact its interest-rate decisions have on house prices. And the question of whether rising housing costs were getting enough attention was a significant theme in the European Central Bank’s recentGovernments first paid proper attention to measuring inflation around the time of the first world war, when they knew prices were rising and wanted to make sure workers’ pay kept pace with living costs.
So why doesn’t CPI include house prices? Inflation is a measure of the costs of buying goods and services for consumption today. A house provides shelter and security to those who live in it, but the value of those services is dwarfed by the price of the house. So buying a house is about investment rather than current consumption.
Including house prices, which can be volatile, in inflation would be difficult. And it is not straightforward to calculate the proportion of consumer spending directed towards buying houses. A person could go 20 years between two house purchases, and then might spend more than eight times their annual income on it. But many people also sell a home at the same time as buying a new one, so what matters for their spending is the relative movement in the price of the two properties.
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