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Homes and real-estate increasing in value should be considered inflation (sopuli.xyz)

submitted 8 months ago* (last edited 8 months ago) by [email protected] to c/[email protected]

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Housing is something people need, and is similarly a necessity like food or electricity. It needs a lot of money to keep in a livable shape, plus constant attention, and will lose its value if just left in place. As such it's not an investment, unless the market isn't working like it's supposed to.

When there was the long period of "low inflation" after the 2008 housing crisis, it's because we didn't consider housing prices a part of the inflation – if housing getting more expensive would've been taken into account we should've never had such a long period of low interest rates. If rents going up is inflation, appreciation should be as well.

As such, housing getting more expensive should be considered a bad thing, as it leads people to mistakenly see it as an investment. People will then "protect" their investment by trying to prevent new projects etc. Nobody would get angry if bread was cheaper the next day, just because they already bought it yesterday.

EDIT: apparently I've been a bit misinformed. I'm not from the US, but EU (Finland) and have understood that our indices don't really include owner-occupied housing in the calculation, but only the direct costs like energy and rent with some weight – which was at least partly the case, but there would seem to be some changes coming. Thanks for the enlightening replies, I'll have to read a bit more into it.

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[–] [email protected] 8 points 8 months ago

Inflation does include home prices.

https://www.whitehouse.gov/cea/written-materials/2023/04/27/update-on-housing-inflation-in-cpi/

In contrast, however, housing’s contribution to inflation has significantly increased. Housing now accounts for a third of the consumer basket of items measured in CPI, so even small increases can have an outsized impact on inflation. Last June, housing accounted for a fifth of inflation, contributing 1.7 percentage points. By March 2023, housing’s contribution rose to 2.6 percentage points, making up half of annual CPI inflation. For perspective, before the pandemic housing would typically contribute about 1 percentage point to inflation.

CPI is the standard inflation measure you see in headlines.

What I think you might be getting a is a change to how housing prices were included in 1983. For homeowners, they use a method of calculating how much they would pay if they were renting their home from a landlord.

This sometimes gets misreported as housing not being included in CPI, but that's not true. This method does have its critics, to say the least. However, it doesn't seem to be absurdly off, either.

https://www.fullstackeconomics.com/p/why-the-government-took-home-prices-out-of-the-consumer-price-index

After doing this research, we believe the critics of current BLS methodology are partly right and partly wrong. Today’s annual inflation rate likely would be a few percentage points higher if the BLS were still using its pre-1983 methodology for shelter inflation. But it’s not true, as many people claim, that the switch led to systematic understatement of the inflation rate over the last 40 years.

“We didn’t find that inflation was on average higher or lower with the old method,” said economist Jonathan Hazell, one of the paper's authors. “Rather, it was more volatile for reasons that didn’t make much sense to us.”