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.
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.