To the casual reader the headline for this piece may be something of a surprise. After all they would reasonably expect that what is usually the largest component of people’s spending to also be a major component of inflation measures. But the reality is that some measures ignore owner-occupied housing entirely. An example of this is the HICP measure of the Euro area which the UK copied for its own CPI measure. Others pursue the fantasy that you can use rents as a proxy for actual housing costs and the US CPI is an example of that where more than a quarter of it (26.7%) is such fantasy rents as who would buy a house or flat if you still had to pay rent? So the reality is that owner-occupied housing is usually either ignored or Imputed Rents are brought into play. Countries which use actual housing costs such as house prices and mortgage costs are rather rare.
Now let me switch to the Financial Times today which suggests you can try to fool people but they will spot what is happening eventually.
Dissatisfaction with housing costs has hit a record high across rich countries, soaring above other worries such as healthcare and education.
Half of respondents in OECD nations are dissatisfied with the availability of affordable housing, according to Gallup Analytics figures, a sharp rise since central banks hiked interest rates to deal with the worst bout of inflation in a generation.
Now I would contend that the issue here is that housing costs have soared and that it has been a deliberate policy with the periods of ultra-low and in some cases negative interest-rates. Just to make sure central banks backed this up with QE bond buying to also reduce fixed-rate mortgages. Thus house prices soared and conveniently they are not in the inflation measures. Regular readers will know that this is key theme of my work as house prices should be in any honest inflation measure. There is an irony here in that my opponent over the years has been the former economics editor of the Financial Times Chris Giles who has been a vocal opponent of the UK inflation measure (RPI) which includes house prices. No doubt that is why the article is followed by this.
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House Prices have soared
If we continue with the Gallup piece we see that my case that house prices have been deliberately pumped up gets quite a lot of support. Let us start with the United States.
The average house price is now almost 38 per cent higher than when US President Joe Biden took office in January 2021, according to the Case-Shiller index.
So house prices have soared and this is a clear response to economic policy. The Federal Reserve slashed its official interest-rate to 0.1% and bought trillions of dollars of US government and mortgage bonds to suppress mortgage rates creating a house price surge. To that recipe we can add a soupcon of US government furlough payments and the house price fires were raging.
They take a different tack with the UK but the implied view is much higher house prices over time. Oh and presumably unintentionally they have pointed out how much house prices have risen since the Bank of England was put in charge of interest-rates and monetary policy.
In England, house prices are now eight times the average annual wage, according to official statistics. That is more than twice the ratio seen when the last Labour government took office in 1997.
Oh and I also note the reference to England rather than the UK. Perhaps FT journalists all live in England. There is also an effort to defend Europe although as you can see it rather crumbles.
While higher rates have helped bring down property prices in several European countries, housing remains more expensive than before the pandemic — even before factoring in higher borrowing costs.
In fact the Euro area provides a lot of backing for my arguments on house prices. In the Euro area house prices fell in the period late 2011 to early 2014. You do not have to believe that Mario Draghi’s introduction of negative interest-rates and large-scale QE bond buying was caused by this to note that house prices then rose. The previous falls were replaced by rises of the order of 5% per annum which would have raised the inflation numbers if they were counted in them. Then there was the surge in response to the Covid easing of monetary policy as house price growth rose to 9.8% which of course was on top of the previous rises.
There does seem to be quite an issue in Europe and whilst one can put the German numbers down to its present economic crisis to some extent, Spain has been doing much better.
In Germany, the share of those unhappy about the availability of affordable housing rose to a new high of 46 per cent, up from 42 per cent in 2023 and more than double the levels up to 2012. In Spain, the share of those dissatisfied with housing rose to 62 per cent in 2024, the highest since the financial crisis.
Mortgage Rates
These are not covered explicitly in the main but we do get some implicit references.
Research by Harvard University’s Joint Center for Housing Studies showed the monthly housing payment on a median-priced home with a low-deposit loan, as favoured by first-time buyers, was now $3,096 — compared with around $2,000 in January 2021.
Some of the higher mortgage payments will be due to higher house prices but some due to higher mortgage rates. There is also a bit of irony in that those who ignored the Forward Guidance of central bankers about interest-rates being lower for longer are doing better than those that did.
Meanwhile, many existing homeowners have locked in 30-year mortgages at ultra-low rates, and as a whole are paying less on servicing debt as a percentage of income than at any time since 1980, according to Harvard.
Rents
There is only a relatively minor reference to rents which is somewhat revealing I think.
Rents, meanwhile, have surged at a time when higher prices for other essentials, such as food and fuel, have been cutting into disposable incomes.
As well as the problems created by the use of Imputed Rents there have been issues with the measurement of actual rents. Part of the problem is that the international standard is to use a “stock” of rents which means the numbers are lagged and out of date. The US uses a 6 month stock and the UK a 14 month one. Those are the theoretical numbers but in practice if you look at the numbers then the lag may well be more like 2 years. So yes rents are higher but the official measures are telling us in 2024 what actually happened in 2023 and 2022.
Comment
I welcome any media light shone on the issue of housing costs as hopefully it will make people realise that official measures of inflation if not fraudulent are misleading. House prices and mortgage rates should be in the official measures. The only nuance is that the version targeted by the central bank should exclude mortgage rates as otherwise they raise the level of targeted inflation when they increase interest-rates. Curiously the Bank of Canada did not spot this and made what is a basic error.
As to the reasons behind this I think that much of it is circumstances rather than conspiracy. If we look at the exclusion of owner-occupied housing from the Euro area HICP I can see how they may have intended to include it over time. The next bit is that once Treasuries and central banks spot such an opportunity they will take advantage of it. They can then claim that raising house prices is a wealth effect and ignore the fact that for first-time buyers in particular it is inflationary. To my mind that is why the Gallup research has a clear age bias.
The Gallup data, based on responses from more than 37,000 people in the 37 countries that make up the OECD’s club of wealthy states, show that discontent over housing affordability is highest among under-30s and those aged 30 to 49, many of whom may be trying to get on the property ladder.
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