Bernard L. Madoff

CPI up for review

34 posts in this topic

If you want rent (or whatever) included in CPI, here is your chance to have your say...

http://www.abs.gov.a...from-banner=HPI

Good find. I wonder what the interest rate would be now if the price of houses was currently included. The biggest purchase in most peoples lives and it's not included in the CPI? It doesn't make sense. Actually, scratch that - we probably wouldn't have had the bubble in the first place if rates reflected the price increases.

Edited by staringclown

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Good find. I wonder what the interest rate would be now if the price of houses was currently included. The biggest purchase in most peoples lives and it's not included in the CPI? It doesn't make sense. Actually, scratch that - we probably wouldn't have had the bubble in the first place if rates reflected the price increases.

:blink:

Open the front page of any newspaper for the last decade and you have RP Data figures plastered all over it with these figures...

I don't think it's going to be any surprise to anyone in the country that house prices are up...

I'm actually surprised this country hasn't devoted a damn national holiday to the subject, they're that euphoric over the figures in recent times!

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Actually, scratch that - we probably wouldn't have had the bubble in the first place if rates reflected the price increases.

I don't think house price increases actually reflect anything - CPI, wages, quality of the house ...

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Considering that there are some very bright, economically savvy people on the forum, perhaps someone could put up a draft of a statement for submission for comments and we could try to refine it into something that might be looked at. Deadline is Mar 12 and I would recommend submitting it by post rather than email (might get taken more seriously that way). Put it on fancy letterhead and it might get taken more seriously still.

I could easily sit down and rant away but rants will be binned. It will need to be well structured, relevant and have some substantial knowledge of economics behind it to make it past the interns i reckon.

Anyone up for posting the first draft?

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Anyone up for posting the first draft?

Why don't you start? From experience, if you ask someone else to do it, noone will :)

I'm happy to help edit a rambling rant to sanity.

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I seem to recall someone saying that dwelling prices were not included because they were considered to be investments. That would seem to be easily rectified by dropping IPs from the equation. If you just weight dwelling price changes in proportion to their size (relative to the economy as a whole) i don't see what logic there is to compel their exclusion. you would only be focusing on houses actually purchased/sold for ppor purposes so it seems relevant enough.

but then again i speak from ignorance. perhaps someone else can offer a better model of how house price shifts could be incorporated into the CPI in a manner that does not run blatantly counter to the underlying principles adopted by the ABS?

this sounds like a fairly major shakeup of how they define and develop cpi so if there really are significant flaws in it, now would definitely be the time to explore them and formulate a coherent suggestion for rectifying those flaws.

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Why don't you start? From experience, if you ask someone else to do it, noone will :)

I'm happy to help edit a rambling rant to sanity.

will give it a go later on tonight, assuming nothing good is on tv (hahahaha, there is never anything good on tv... well, cept for the simpsons.)

Edited by urchin

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Considering that there are some very bright, economically savvy people on the forum, perhaps someone could put up a draft of a statement for submission for comments and we could try to refine it into something that might be looked at. Deadline is Mar 12 and I would recommend submitting it by post rather than email (might get taken more seriously that way). Put it on fancy letterhead and it might get taken more seriously still.

I could easily sit down and rant away but rants will be binned. It will need to be well structured, relevant and have some substantial knowledge of economics behind it to make it past the interns i reckon.

Anyone up for posting the first draft?

I was looking at the pdf link from the ABS web site last night. There are reasonably strict requirements on what the public can comment upon. The one perhaps most interesting to the forum would be the "outlays" vs "aquisition" models. Outlays seems to be the model that takes into account rents and mortgage repayments. At least from my initial read of the document. I would be happy to contribute (within my current time constraints) smile.gif

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CPI needs to include house price inflation, because sooner or later that inflation leaks into the rest of the economy, so it needs to be identified and dealt with sooner than later or never in our current case.

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Personally I believe they will simply modify it to make it easier for the Gov to convince the public that the Gov is doing a great job.

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Personally I believe they will simply modify it to make it easier for the Gov to convince the public that the Gov is doing a great job.

Perhaps. But if you submit a proposal and it is ignored you get more "street cred" when you complain later than if you did nothing...

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Urchin good idea. I think as you say a real letter. if we all print out letter and signcover saying I support enclosed so they get50 odd of the same ...

My biggest concern now is it is too late.

The reba would love to introduce land and increase the rent component because if at this stage there is neg pressure they getto reduce rates.

They were blind to it on the way up. We do not want them fighting it on the way down.now

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I seem to recall someone saying that dwelling prices were not included because they were considered to be investments.

Not quite - housing is NOT deemed to be consumption, thus it is not included in CPI. Housing will never make it directly into CPI - if it did so, the RBA would have to raise rates immediately and substantially.

That would seem to be easily rectified by dropping IPs from the equation. If you just weight dwelling price changes in proportion to their size (relative to the economy as a whole) i don't see what logic there is to compel their exclusion. you would only be focusing on houses actually purchased/sold for ppor purposes so it seems relevant enough.

But PPORs are defacto investments now - the new Australia looks at housing as a bargaining chip in the casino. Hence the mental obfuscating about "consumption" vs investment. We should get rent excluded from CPI as well - surely it is an investment in your own accomodation?

but then again i speak from ignorance. perhaps someone else can offer a better model of how house price shifts could be incorporated into the CPI in a manner that does not run blatantly counter to the underlying principles adopted by the ABS?

I don't think you're ignorant, it just seems you haven't drunk the kool-aid and succumbed to vested interest. For shame !

this sounds like a fairly major shakeup of how they define and develop cpi so if there really are significant flaws in it, now would definitely be the time to explore them and formulate a coherent suggestion for rectifying those flaws.

I bet nothing changes. Infact, the only change I see coming is the complete removal of all daily consumables, to be replaced by imported Chinese electronics. That'll keep inflation flow.

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CPI needs to include house price inflation, because sooner or later that inflation leaks into the rest of the economy, so it needs to be identified and dealt with sooner than later or never in our current case.

There wouldn't need to be a debate about CPI composition if governments and banking regulators took more direct action:

- force sensible lending standards

- use targetted taxes to hammer spivvy "investment"

- enforce laws

But that would run the chance of actually working, so better to hide behind CPI definitions instead.

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well i didn't have a chance to get any work done on this last night - ended up doing paying work till 10 pm and couldn't be fussed after that.

thanks goethe. i haven't even had a chance to read through the 60 page pdf they included with the call for comments so perhaps a reading of that will show quite clearly that they have no intention/interest of including housing in the equation. you are most likely correct in that nothing will change vis-a-vis housing. they will have to make some changes in the end, however, if only to justify the time and expense of this revision. however they may just end up being cosmetic changes, certainly. still worth giving a go, i think. if nothing else i will learn a little in the process. only problem is to find the time & energy....

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well i had a chance to read through some of the review guidelines, imagine my surprise when i discover that housing is included in the cpi index. not sure where the rumour that it wasn't started. looking at the dec. cpi report, sure enough, housing is there (purchase and rent).

i guess i don't have to worry about putting together a proposal then.

from their manual:

Owner–occupied housing costs

2.13 The treatment of expenditure on owner–occupied housing costs has fuelled much of the debate on the relative merits of the outlays and acquisitions approaches for the CPI (see Appendix 3, Graph 1).

Under the acquisitions approach, an appropriate measure is the change in prices for the new stock of owner–occupied housing, new renovations and extensions, and other costs incurred (e.g. maintenance costs and council rates). This excludes mortgage interest payments.

3 The cost–of–use approach results in a basket which differs from those delivered by the alternative approaches in several important areas, specifically, goods and services provided to households at subsidised prices, and housing and other consumer durables which are consumed over a long period of time. For these items, consumption does not equal acquisition. A cost–of–use index requires the estimation of the value of that proportion of the stock of these items ‘used up’ in the base period (the stream of services consumed). In the case of owner–occupied housing, for example, the cost–of–use approach would adopt the rental equivalence method and impute rents based on market rents for similar dwellings (ABS 1997a).

6 DEC 2009

ABS ISSUES TO BE CONSIDERED DURING THE 16TH SERIES AUSTRALIAN CONSUMER PRICE INDEX REVIEW 6468.0 Main differences between conceptual approaches continued

RELATIONSHIP OF THE CPI TO OTHER INDEXES

Under the outlays approach, the required measure includes changes in the rate of interest paid on mortgages and other costs incurred.

2.14 In the context of the 13th series review (1997), the most problematic area was the treatment of owner–occupied housing. Those favouring a CPI for price inflation measurement were unanimous regarding the exclusion of interest charges. There was less certainty regarding the approach to measuring the price of the housing services consumed by owner–occupiers. The ABS decided that a CPI constructed using the acquisitions approach best met the requirement for a measure of price inflation as it was agreed that interest rates were not market prices for goods and services.

so basically their approach factors in housing acquisition costs (for ppor, not ip) and they ignores interest. hard to argue with that. so what have we been complaining about all this time? what am i missing?

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Maybe the weighting then?

If 30% of your outlays are housing maybe 30% of the index weighting should be housing (:huh:)

So, if the 70% non housing components increased in value by 2% and real estate by 7%. By ratio, your CPI is 3.6%

Non housing 3%, real estate 7%. CPI is 4.2%

Consider that Australia's largest Sydney has had a few years of flat growth from about 2003 - 2008.

Maybe housing should be 50% of the CPI (??)

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well i had a chance to read through some of the review guidelines, imagine my surprise when i discover that housing is included in the cpi index. not sure where the rumour that it wasn't started. looking at the dec. cpi report, sure enough, housing is there (purchase and rent).

Does it cover land price inflation?

Does it cover existing houses? Notice they say "new stock of owner–occupied housing, new renovations and extensions".

And we have the omission of mortgage interest. Why?

so basically their approach factors in housing acquisition costs (for ppor, not ip) and they ignores interest. hard to argue with that. so what have we been complaining about all this time? what am i missing?

They should include IPs! One man's IP is another family's potential PPoR. A house is a house, regardless of buyer intentions.

Speaking of ABS links, you might want to check

http://www.abs.gov.a...2009&num=&view=

6.24 The weight given to house purchase should reflect net acquisitions by households, and expansion of the housing volume by alterations and additions. Sales of houses that take place between households are excluded, so that the weights relate only to net additions to the housing stock arising from household purchases from other sectors (e.g. from businesses such as builders and developers).

6.25 An additional factor that arises with houses is that as well as providing shelter to their owners, they include an investment element because they typically appreciate over time. For the purposes of the CPI, the cost of housing should reflect only the shelter component. A common approach is to regard the cost of the land as the investment component, and the cost of the structure as the shelter (or consumption) component.

Coming back to "why" we should be complaining - every other day, we are told that house prices are rising 10%+ p.a. Why SHOULDN'T this be specifically targetted in the CPI?

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And we have the omission of mortgage interest. Why?

Because the mortgage interest is strongly influenced by CPI?

If you put up interest rates to stop inflation which caused mortgages (and so CPI) to go higher you would have to put up interest rates to stop inflation.

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Its the weighting that's the problem. Household's biggest expense is usually accommodation, but they give it much the same weighting as TVs and stuff. I pay my mortgage every fortnight, I haven't bought a television since 2002. While this means I am quite overdue to upgrade my 35kg CRT to a 5kg LCD (and am actually half heartedly looking for one), I don't think the fact that televisions are a lot cheaper than 2002 actually has much of an effect on people while rent and house prices going up since 2002 has had a huge effect, and shouldn't be cancelled out by the drop in price of cheap Chinese televisions in the same period. Anyway, the baby bonus pays for most TV upgrades, doesn't it? :P

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Thanks for the comments all.

I think the focus on acquisition price (and exclusion of interest payments) is justified. The price of a house is the price of a house, the price of credit is the price of credit. The price of credit can be dealt with separately. As tor mentioned, there is the possibility of a feedback loop that would distort things. accounting for fluctuating interest rates, while no doubt possible, would confuse the hell out of things--at least for me. In principle I think something like the CPI should be a fairly straightforward measure--how much has the price of X changed over Y period of time.

As far as only focusing on new stock (if by that they mean newly built houses) that does seem extremely limited and ignoring the land component is also absurd. It's very difficult to buy a house if you don't have a piece of land to put it on. and what percentage of transfers are for new stock? a very small percentage, i guess.

The comment about IPs is also rings true. The purpose of the dwelling is not decided until after the purchase. if there are properties that are solely investment properties (defense housing with long leases, hotel rooms) then it would make sense to exclude them, but "normal" dwellings? if we are trying to calculate how much it will cost a person to buy a ppor certainly the influence of ips must be taken into account.

So, for our suggestion list so far, I see the following:

1. include the land component because... you can't get a home without land.

2. add in the ip component as the function is only decided after the purchase

3. if it is not already done, weight the data to more appropriately reflect the role housing expenses play in most households.

4. include existing dwellings, not just new stock as the vast majority of dwelling transfers are existing stock.

Anything else?

Edited by urchin

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Because the mortgage interest is strongly influenced by CPI?

If you put up interest rates to stop inflation which caused mortgages (and so CPI) to go higher you would have to put up interest rates to stop inflation.

Whilst you have a fair point, there are ways to mitigate this. One is to use a "deflated" mortgage interest measure, like is done with GDP and the CPI deflator.

What we want to capture is the effect of rising mortgage sizes on mortgage interest payments. Not including mortgage interest at all is deliberate obfuscation - IMHO, to make sure house price inflation doesn't creep into CPI.

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So, for our suggestion list so far, I see the following:

1. include the land component because... you can't get a home without land.

2. add in the ip component as the function is only decided after the purchase

3. if it is not already done, weight the data to more appropriately reflect the role housing expenses play in most households.

4. include existing dwellings, not just new stock as the vast majority of dwelling transfers are existing stock.

Anything else?

Land is the key. But as per the link above, the ABS considers land to be the "investment component". Given that they only want to measure consumption, I don't see it appearing in CPI, unless they change their tune.

So, if they wont measure land price inflation via the CPI, then use taxes instead. Either way, this egregious inflation is neither acknowledged nor controlled.

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