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Why can’t we have an inflation index which includes house prices?

21 May 2015

10:49 AM

21 May 2015

10:49 AM

The cost of living, the Office of National Statistics (ONS) reported on Tuesday, has fallen by 0.1 per cent over the past year. Or at least it has if you rent your home and have no intention ever of owning your own. If you do aspire to buy a home, on the other hand, you might conclude that the government’s preferred inflation index – the Consumer Prices Index (CPI) — is a fraud on the public which ignores the single biggest cost you are likely to face in life: buying a property. It includes no element of house prices whatsoever. It includes rents, but in such a way that social housing rents are over-represented. It is only thanks to the exclusion of house prices that CPI is falling when, on the same day, the ONS reported that house prices have risen over the past year by 9.6 per cent.

Until 2003 we did have an official inflation index which included an element of house prices. The Retail Prices Index (RPI) included mortgage repayments.  Then, Gordon Brown decided to replace RPI as the government’s preferred index, using CPI instead. Cynics might wonder whether this was related to the fact that house price inflation was over 20 per cent at the time, and was threatening to ruin Brown’s promise to ‘end boom and bust’.


Two years ago the ONS admitted that the housing costs of owner-occupiers are under-represented in the CPI and this was a ‘weakness’. It therefore came up with a new index, CPIH, which is supposed to be the CPI but including more of the costs faced by owner-occupiers. However, CPIH doesn’t include raw house prices, or even mortgage repayments. It claims to represent house prices through something called ‘rental equivalence’ – namely the theoretical rent that homeowners would pay if they were renting their homes rather than buying them.

That is silly because it ignores reality. In any case, CPIH has been put up in the loft to gather dust.  After several months assessment, CPIH was made an official national statistic in November 2013, only to be dropped the following August. It is still published, but it is kept quiet. The latest figure, for the year to April, by the way, is 0.2 per cent. RPI – which is also still published, but quietly – currently stands at 0.9 per cent.

Why can’t we have an inflation index which includes raw house prices? The statisticians’ argument is that houses are investments and therefore should be excluded from a cost of living index. Homes may be treated as commodities by some – namely the overseas speculators who have been scooping up most new property in London – but they also happen to be used as somewhere to live. Given that 65 per cent of Britons are owner-occupiers this is a serious omission.

Frustrated homebuyers can be forgiven for being left more frustrated by the dry arguments of statisticians and wonder whether the real reason house prices are not included in the government’s official inflation index is that they keep going up. If we had an inflation index which truly represented the cost of living it might make the Chancellor’s record on real incomes look even worse than it is. It might, too, push up interest rates, taking away the government’s ability to service its phenomenal debts at rock bottom cost.


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