Ross Clark Ross Clark

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

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.

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