If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.
Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.
In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”
If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions.
How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.
The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”
Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.
A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.
PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?
@PerKurowski
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