Housing is something people need, and is similarly a necessity like food or electricity. It needs a lot of money to keep in a livable shape, plus constant attention, and will lose its value if just left in place. As such it’s not an investment, unless the market isn’t working like it’s supposed to.
When there was the long period of “low inflation” after the 2008 housing crisis, it’s because we didn’t consider housing prices a part of the inflation – if housing getting more expensive would’ve been taken into account we should’ve never had such a long period of low interest rates. If rents going up is inflation, appreciation should be as well.
As such, housing getting more expensive should be considered a bad thing, as it leads people to mistakenly see it as an investment. People will then “protect” their investment by trying to prevent new projects etc. Nobody would get angry if bread was cheaper the next day, just because they already bought it yesterday.
EDIT: apparently I’ve been a bit misinformed. I’m not from the US, but EU (Finland) and have understood that our indices don’t really include owner-occupied housing in the calculation, but only the direct costs like energy and rent with some weight – which was at least partly the case, but there would seem to be some changes coming. Thanks for the enlightening replies, I’ll have to read a bit more into it.
As others have noted, it is included in inflation measures here.
But on your point about price appreciation being a negative factor not positive, I’m with you. I am not helped by my house being “worth more”, it just raises my cost in taxes and insurance and makes my city shittier when the people who work here can’t live here because they are priced out.
I talk with the husband about this - we bought our house at what I thought was the peak of some bubble, thought we overpaid. But not even 5 years later it would sell for twice that, so he thinks we got a good deal. I’m valuing the utility of housing as shelter, it can’t be “worth” more than 30% of two average monthly net-pay for someone working here, right? By that measure we overpaid, can only barely afford it with two good incomes (us) plus two part time incomes (our teenage kids) He’s valuing it like an investment and by that measure we got a good deal, we bought something for x and now it’s worth 2x.
As someone who lives in a mid-sized city, esp. in a non-coastal state, I get a little jealous of those who are building up equity faster in larger metro areas. Higher home prices yes, but also higher salaries. If you are only going to live in that city for the rest of your life then you have to weigh the pros and cons entirely within that bubble of reality (overall quality of life and cost of living). OTOH, if you’re willing to move some day to a cheaper area, you can stretch that equity so much further than people who lived there from the outset. This could mean earlier retirement, “better” retirement, financial security and lower stress, money for travel, less traffic, etc. But also loss of services and entertainment opportunities you may come to expect in your well-established stomping ground of today.
Just some thoughts to add to your deliberations.
Wages are still depressed here (I’m in Tampa), it’s the work-from-home Northerners who are still getting paid higher, and people moving from where prices are even higher than here so they can pay more driving up home prices, there is more money here now but it’s not being made here, if that makes sense. The transplants (God I never thought I’d be one of the complaining native born) are causing other problems in Florida, obviously the politics but also are a big factor in the housing inflation. They have done what you are suggesting and it’s a mixed bag, some of the money does stay here and helps but it’s offset by housing cost (rent and prices both) increasing so much more than wages. My first house was purchased for about one year of my gross pay in 1994 - this one, same size, cost 4.5x my annual gross in 2020.
By the time our house is paid off, I expect property taxes will have increased to the point where it makes little difference to our monthly budget. That’s just with fairly average housing inflation, not the ridiculous jumps in the last few years.
That said, networth on paper does have some meaning. There’s a point where our house is going to be worth so much that we can find a lower cost of living area within an hour or so drive of here and possibly not have to work anymore at all with what we’ll make off the sale. If it’s high enough and we’re getting soaked on property taxes, it’d be hard to justify not doing that.
It’s amazing what you can get statistics to say when you decide what you want it to say before you decide what data to count.
I’m sure there are valid economic reasons to not include it…and I’m also pretty sure those reasons are made up obfuscate a larger goal of maintaining the status quo.
It is included, but I tend to agree with your second paragraph, anyway.
What happened is that in 1983, the housing factor in CPI was changed to owner-equivalent rent. This means that it tries to calculate what a homeowner would pay if they had been renting their house instead.
The reason for this is that economists in the 1970s argued that homes are treated more like stock market investments. You hold onto it for a while, the price goes up, and then you sell it at a profit. We don’t include stock market investments in inflation, so we shouldn’t treat houses like that, either (so the argument goes).
I disagree that houses should be treated that way. They are durable goods you use that are necessary in your life, and require upkeep. Stocks are not. Treating them as investments has led to all sorts of problems.
In practice, this may not mean much to headline inflation. Reconstruction of the old methods (which is imperfect due to the right data no longer being collected) suggests CPI would actually be lower on average, but would also be more volitile. Homes as investments certainly has other effects, though.
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Should’ve probably included where I’m from, that being Europe, more specifically Finland. As far as I know our index for inflation (HICP) sourced from ECB hasn’t so far taken into account OOHC (owner-occupied housing cost) and has focused more on rents and other costs of living. Proposed roadmaps for changing the official indices would back this understanding, unless I’m interpreting something very incorrectly.
There’s some rent controls in place in most European countries, so rents aren’t tightly coupled with house prices in many locations. As such, for specific dwellings it can often be cheaper to rent than to own, since rent increases are regulated at least a bit, but cost to purchase the unit altogether is not. In many more expensive cities there’s also the issue of units not being available to rent, since the rents don’t directly reflect the market value of the rented unit.
Though including OOHC to the calculations will cause some difficulties when you take into account more rural areas, where the value of housing can not only go down, but actually be negative. In rural Finland there are cases where you can actually be paid to get a whole apartment complex out of someone’s hands, since the costs outweigh whatever rent you can get out of the place. People are opening shell companies and selling stock in an apartment complex (a peculiarity of the local system called limited liability housing companies, or asunto-osakeyhtiö) to them at a loss, to get rid of paying for upkeep.
Inflation does include home prices.
https://www.whitehouse.gov/cea/written-materials/2023/04/27/update-on-housing-inflation-in-cpi/
In contrast, however, housing’s contribution to inflation has significantly increased. Housing now accounts for a third of the consumer basket of items measured in CPI, so even small increases can have an outsized impact on inflation. Last June, housing accounted for a fifth of inflation, contributing 1.7 percentage points. By March 2023, housing’s contribution rose to 2.6 percentage points, making up half of annual CPI inflation. For perspective, before the pandemic housing would typically contribute about 1 percentage point to inflation.
CPI is the standard inflation measure you see in headlines.
What I think you might be getting a is a change to how housing prices were included in 1983. For homeowners, they use a method of calculating how much they would pay if they were renting their home from a landlord.
This sometimes gets misreported as housing not being included in CPI, but that’s not true. This method does have its critics, to say the least. However, it doesn’t seem to be absurdly off, either.
After doing this research, we believe the critics of current BLS methodology are partly right and partly wrong. Today’s annual inflation rate likely would be a few percentage points higher if the BLS were still using its pre-1983 methodology for shelter inflation. But it’s not true, as many people claim, that the switch led to systematic understatement of the inflation rate over the last 40 years.
“We didn’t find that inflation was on average higher or lower with the old method,” said economist Jonathan Hazell, one of the paper’s authors. “Rather, it was more volatile for reasons that didn’t make much sense to us.”
Assuming you are talking about in the US, shelter is included in inflation calculations. You can argue about the methodology, but the cost of having a home is in there and does contribute to inflation. It is about 30% of the overall basket.
Yep, should’ve probably clarified that I’m personally not talking about the US. Housing costs are included in HICP (the index in Europe) but not the cost of purchase AFAIK, only the cost of ownership, calculated via more direct means like rent or energy costs.
Had a look and im suprised it doesnt get included. Really if more than 80% of households have to pay for something then it should be included in inflation calculations. That would include electricity, council rates, rent/mortgage and many other necessities that currently only get included by proxy.
This really feels like it should be a thing already so i might do some more research and see if i can find it.
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