We all know that house prices in Australia are broken.
This chart from the Reserve Bank of Australia shows that house prices as a ratio to household
disposable income, is increasing on average.
That means it’s becoming increasingly more difficult for the average Australian to afford
a house as time goes on.
Obviously, the more expensive housing becomes relative to income, the more debt people need
to get into to afford said housing.
It’s a disturbing trend.
I guess it’s no surprise that the established house price index has been going up at a greater
rate than the CPI.
The blue line represents the weighted average of the house price indexes of Australia’s
eight capital cities.
This is using the latest data that I could find from the Australian Bureau of Statistics.
The red line represents the CPI, the Consumer Price Index.
According to the ABS, the CPI measures the average change over time of the prices paid
by consumers for a fixed basket of goods and services.
So essentially, it’s a measure of inflation.
CPI also only represents residents in Australia’s eight capital cities, so this graph is valid
– it’s comparing apples with apples.
House prices have been going up at a much greater rate than inflation.
So my first instinct was, house prices are simply not included in inflation data.
I mean, if they were, then surely CPI should be rising at a much greater rate.
So I consulted the ABS’s Consumer Price Index FAQ.
Scrolling through, there’s tonnes of questions about Cost of Living, CPI Construction, Interpreting
CPI Results, Analytical Measures of Inflation, Further Information, Introduction of Carbon
Pricing, and the very last question (and I’m not joking here), What Role Does Housing Play
in the CPI?
Yes, that’s the very last question.
Either it was the most recent question that the ABS added to this FAQ, or they simply
don’t want people to easily find the answer to this important question.
In my opinion, shouldn’t Further Information be at the bottom?
Wouldn’t that make more sense?
Anyway, in answering the question, “Does the ABS include housing in the CPI and/or
Living Cost Indexes?” – the least important question apparently – they reply, “Housing
plays an important role in the calculation of the CPI with almost 23 per cent of all
spending by Australian households being directed towards housing”.
I like how they answered a yes/no question with a non-yes/no question response.
Anyway, continuing, “Almost 8 per cent of all household spending is directed towards
the purchase of a new dwelling, while rents attract around 7 per cent of total spending
by households”.
Then they talk about electricity, gas and water making up almost 8% of spending.
This all sounds a little bit like beating around the bush to me.
Onto the next paragraph, “Of note, land is excluded from the calculation of the Australia
CPI”.
Why?
Because, “the purchase of land is considered an investment rather than consumption”.
And apparently, this is in accordance with “international statistical standards”.
So in summary, only new dwellings are included in the CPI calculations, but not the land
they sit on.
And importantly, established dwellings are also not included!
So if you buy a secondhand house that has risen in price over the last year by say 15%,
that massive increase in price is not reflected in the Consumer Price Index.
This information (or should I say, misinformation) is corroborated by the Reserve Bank of Australia
in their Statement on Monetary Policy – May 2019.
They state, “The new dwelling purchase component of the CPI captures the cost of adding to
the housing stock – newly built dwellings and major renovations.
It is measured as the price of a new dwelling, excluding the value of the land.
Purchases of established dwellings are not captured in the CPI, because they are treated
as transfers of existing assets.
As a result, the price of established dwellings has no direct influence on CPI inflation.”
So yes, this makes a lot of sense now.
CPI doesn’t include established dwellings.
It doesn’t include land.
Essentially, it only includes the material cost and labour of your NEW house which you
will probably only ever buy once in your lifetime.
To be fair, lots of people NEVER buy a new house, so according to this data, you are
never experiencing housing inflation.
I call BS on that.
The CPI simply does not represent the actual cost of housing.
So why does any of this matter?
Well, one reason, according to the ABS’s FAQ, “The CPI affects almost all Australians
because of the many ways it is used.
It is used by the government and economists to monitor and evaluate levels of inflation
in the Australian economy, and for adjusting fixed payments, such as pensions and contracts”.
So if you’re a pensioner (or a JobSeeker, or a JobKeeper, or whatever the hell they
call it nowadays, your payments are simply not going to keep up with the cost of housing.
The system has been inherently designed that way.
House prices will always rise faster than the CPI because of the way it’s been designed.
Anything that is based on the CPI will lag behind house prices.
If we go back to the ABS FAQ, they also included one important note here, “Land and the dwelling
for both new and established houses are included in the calculation of the ABS Selected Living
Cost Indexes (SLCIs)”.
So of course, I wanted to take a look at this SLCI.
I think they would have been better offer naming it SLIC — SLICK — but that’s
just my humble opinion.
So we’re met with this giant table with a whole host of living cost indexes for various
goods and services.
If I zoom up here and look at Housing, the LCI for most groups is 0.4, but the CPI is
not all that much different at 0.3!
I thought these SLCIs were supposed to include all housing price information.
But looking next to the word “Housing”, we can see they have a small letter “a”,
which obviously refers to a footnote.
Looking at the footnote it says, “New dwelling purchases by owner-occupiers are included
in the CPI but EXCLUDED from the Selected Living Cost Indexes”.
They just can’t help themselves.
They just can’t seem to bring themselves to include all housing data in a single index.
It’s just absurd!
So why are the government doing this?
Why are they so desperate to exclude housing from inflation?
I’ll tell you why, because if inflation increases, house prices will go down.
And guess what?
The Government don’t want house prices to go down.
How do I know any of this?
Because I can see it on the RBA’s website.
You see, the RBA have a target inflation range of 2-3%.
If they included housing, then inflation would skyrocket!
What happens when inflation skyrockets?
Again, according to the RBA, consumers’ purchasing power goes down.
Consequently, workers may then seek larger wage increases.
Of course, we don’t want that to happen.
We don’t want workers being able to afford housing.
How do the RBA offset high inflation?
They do it by increasing the cash rate.
When inflation is too high for too long, the RBA increases interest rates.
What effect does increased interest rates have on the economy?
Well, first of all, savers are rewarded.
They get more interest when they put money in the bank.
Consequently, economic activity goes down because people are less likely to spend and
more likely to save.
Secondly, because interest rates are high, people are less able to afford a mortgage,
and house prices go down.
Obviously, that’s not what the Australian Government want.
They want the opposite.
Consequently, we’ve found ourselves in a situation where interest rates have steadily
been going down over the last 30 years.
Why?
To keep house prices inflated.
As interest rates go down, house prices go up.
And that’s exactly what’s happened over the same time period.
This is why inflation data does not include housing, at least, not in its entirely.
The system is being manipulated by the powers that be to keep Australian house prices at
some of the most expensive and unaffordable levels in the world.
This keeps rich people rich.
This keeps you in debt.
And when you’re in debt, you’ll keep working in a job that you probably don’t like, which
makes you a good little citizen who does what they’re told.
And thanks to all this government manipulation that keeps house prices higher than they should
be, that’s why I titled this video, “House Prices Are a Con”, because they are.
And that’s all I have to say on this matter.
Thanks for watching.