Australia’s official inflation figures ignore the cost of buying a house, and it’s a quirk in the calculation that obscures young people’s financial reality, economists have warned.
The median national home value is now $656,694, and for people in Sydney it’s $1,017,692. However, the cost of saving for a deposit isn’t captured in the official consumer price index (CPI).
It’s a data decision that disadvantages young people, Integrity Economics’ Thomas Keily said.
The Australian Bureau of Statistics (ABS) considers land an asset, and as the CPI is focused on the cost of living, including the cost of land complicates the equation.
“Where it gets tricky is that we use the CPI and the cost of living interchangeably… but it’s really only consumables and it doesn’t include the other things that come into the cost of living,” he told Yahoo Finance.
“The argument to make is that houses are a cost of living, if you’re saving for a deposit and you’re a young person, it’s a cost you’ve got to bear, so it’s reasonable to include it in… our discussion of the cost of living.”
WATCH: What you need to know about the Big Four Banks.
The ABS considers rent to make up less than 7 per cent of the basket of goods included in the CPI.
Keily, who is one half of the Equity Mates Comedian v Economist podcast, believes policy makers need to pay closer attention to how young people are actually spending their money.
“As a young person… we assume that if you’re saving for a house, 20 per cent of your take-home pay should be going towards trying to save for a deposit. So I think that should be included,” he said.
“We should be looking at the whole budget and all of those spending allocation decisions, and look at the pressures that come up on all of those components. When house prices go up, and you’re trying to save for a deposit, that directly impacts the price of what you’re saving for.”
Equity Mates CEO Bryce Leske noted that while headline inflation is now at 3.8 per cent - a 10-year high - house price adjusted inflation is even higher, at 5.7 per cent. That reflects a 20-year high.
“That is, the CPI is understating the cost-of-living pressures facing someone trying to buy a house by almost 50 per cent,” Leske said.
“This means that if you had $100,000 a year ago, for most people that $100,000 is now worth $96,200, in real terms. For young people trying to save a deposit, it is worth $94,300.”
The fact that this isn’t captured in the official figures means young people feel “left out of the official economic story”, Leske said.
It’s a challenge economists and analysts around the world are currently grappling with.
Of all 40 countries captured in OECD data, only three saw house price falls in the first three months of 2021. That’s the lowest number since 2000, when this data series began.
At the same time, annual house price growth hit 9.4 per cent - a 30-year record.
The European Central Bank (ECB) president Christine Lagarde in June acknowledged the “disconnect” between house prices and the broader economic story.
The ECB has since committed to including house prices in their inflation targets, although there’s little detail on how it will calculate this.
Closer to home, Keily believes it’s an issue that needs to be urgently addressed.
“The Reserve Bank of Australia is an inflation-targeting central bank, so that’s one example of an economic institution that is focusing on something that isn’t fully accounting for the pressures that young people face,” he said.
“It’s also within our political discourse, talking about inflation and the cost of living. [But] the perspective of young people is sidelined by measures like the CPI.”