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House Prices Are a Con (The Murky World of House Prices, Inflation, and CPI) - YouTube
Channel: Daily Insight
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We all know that house prices in Australia
are broken.
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This chart from the Reserve Bank of Australia
shows that house prices as a ratio to household
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disposable income, is increasing on average.
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That means itâs becoming increasingly more
difficult for the average Australian to afford
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a house as time goes on.
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Obviously, the more expensive housing becomes
relative to income, the more debt people need
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to get into to afford said housing.
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Itâs a disturbing trend.
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I guess itâs no surprise that the established
house price index has been going up at a greater
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rate than the CPI.
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The blue line represents the weighted average
of the house price indexes of Australiaâs
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eight capital cities.
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This is using the latest data that I could
find from the Australian Bureau of Statistics.
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The red line represents the CPI, the Consumer
Price Index.
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According to the ABS, the CPI measures the
average change over time of the prices paid
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by consumers for a fixed basket of goods and
services.
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So essentially, itâs a measure of inflation.
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CPI also only represents residents in Australiaâs
eight capital cities, so this graph is valid
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â itâs comparing apples with apples.
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House prices have been going up at a much
greater rate than inflation.
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So my first instinct was, house prices are
simply not included in inflation data.
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I mean, if they were, then surely CPI should
be rising at a much greater rate.
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So I consulted the ABSâs Consumer Price
Index FAQ.
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Scrolling through, thereâs tonnes of questions
about Cost of Living, CPI Construction, Interpreting
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CPI Results, Analytical Measures of Inflation,
Further Information, Introduction of Carbon
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Pricing, and the very last question (and Iâm
not joking here), What Role Does Housing Play
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in the CPI?
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Yes, thatâs the very last question.
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Either it was the most recent question that
the ABS added to this FAQ, or they simply
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donât want people to easily find the answer
to this important question.
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In my opinion, shouldnât Further Information
be at the bottom?
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Wouldnât that make more sense?
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Anyway, in answering the question, âDoes
the ABS include housing in the CPI and/or
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Living Cost Indexes?â â the least important
question apparently â they reply, âHousing
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plays an important role in the calculation
of the CPI with almost 23 per cent of all
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spending by Australian households being directed
towards housingâ.
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I like how they answered a yes/no question
with a non-yes/no question response.
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Anyway, continuing, âAlmost 8 per cent of
all household spending is directed towards
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the purchase of a new dwelling, while rents
attract around 7 per cent of total spending
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by householdsâ.
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Then they talk about electricity, gas and
water making up almost 8% of spending.
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This all sounds a little bit like beating
around the bush to me.
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Onto the next paragraph, âOf note, land
is excluded from the calculation of the Australia
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CPIâ.
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Why?
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Because, âthe purchase of land is considered
an investment rather than consumptionâ.
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And apparently, this is in accordance with
âinternational statistical standardsâ.
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So in summary, only new dwellings are included
in the CPI calculations, but not the land
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they sit on.
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And importantly, established dwellings are
also not included!
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So if you buy a secondhand house that has
risen in price over the last year by say 15%,
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that massive increase in price is not reflected
in the Consumer Price Index.
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This information (or should I say, misinformation)
is corroborated by the Reserve Bank of Australia
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in their Statement on Monetary Policy â May
2019.
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They state, âThe new dwelling purchase component
of the CPI captures the cost of adding to
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the housing stock â newly built dwellings
and major renovations.
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It is measured as the price of a new dwelling,
excluding the value of the land.
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Purchases of established dwellings are not
captured in the CPI, because they are treated
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as transfers of existing assets.
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As a result, the price of established dwellings
has no direct influence on CPI inflation.â
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So yes, this makes a lot of sense now.
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CPI doesnât include established dwellings.
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It doesnât include land.
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Essentially, it only includes the material
cost and labour of your NEW house which you
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will probably only ever buy once in your lifetime.
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To be fair, lots of people NEVER buy a new
house, so according to this data, you are
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never experiencing housing inflation.
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I call BS on that.
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The CPI simply does not represent the actual
cost of housing.
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So why does any of this matter?
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Well, one reason, according to the ABSâs
FAQ, âThe CPI affects almost all Australians
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because of the many ways it is used.
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It is used by the government and economists
to monitor and evaluate levels of inflation
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in the Australian economy, and for adjusting
fixed payments, such as pensions and contractsâ.
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So if youâre a pensioner (or a JobSeeker,
or a JobKeeper, or whatever the hell they
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call it nowadays, your payments are simply
not going to keep up with the cost of housing.
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The system has been inherently designed that
way.
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House prices will always rise faster than
the CPI because of the way itâs been designed.
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Anything that is based on the CPI will lag
behind house prices.
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If we go back to the ABS FAQ, they also included
one important note here, âLand and the dwelling
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for both new and established houses are included
in the calculation of the ABS Selected Living
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Cost Indexes (SLCIs)â.
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So of course, I wanted to take a look at this
SLCI.
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I think they would have been better offer
naming it SLIC â SLICK â but thatâs
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just my humble opinion.
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So weâre met with this giant table with
a whole host of living cost indexes for various
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goods and services.
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If I zoom up here and look at Housing, the
LCI for most groups is 0.4, but the CPI is
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not all that much different at 0.3!
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I thought these SLCIs were supposed to include
all housing price information.
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But looking next to the word âHousingâ,
we can see they have a small letter âaâ,
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which obviously refers to a footnote.
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Looking at the footnote it says, âNew dwelling
purchases by owner-occupiers are included
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in the CPI but EXCLUDED from the Selected
Living Cost Indexesâ.
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They just canât help themselves.
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They just canât seem to bring themselves
to include all housing data in a single index.
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Itâs just absurd!
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So why are the government doing this?
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Why are they so desperate to exclude housing
from inflation?
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Iâll tell you why, because if inflation
increases, house prices will go down.
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And guess what?
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The Government donât want house prices to
go down.
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How do I know any of this?
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Because I can see it on the RBAâs website.
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You see, the RBA have a target inflation range
of 2-3%.
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If they included housing, then inflation would
skyrocket!
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What happens when inflation skyrockets?
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Again, according to the RBA, consumersâ
purchasing power goes down.
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Consequently, workers may then seek larger
wage increases.
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Of course, we donât want that to happen.
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We donât want workers being able to afford
housing.
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How do the RBA offset high inflation?
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They do it by increasing the cash rate.
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When inflation is too high for too long, the
RBA increases interest rates.
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What effect does increased interest rates
have on the economy?
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Well, first of all, savers are rewarded.
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They get more interest when they put money
in the bank.
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Consequently, economic activity goes down
because people are less likely to spend and
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more likely to save.
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Secondly, because interest rates are high,
people are less able to afford a mortgage,
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and house prices go down.
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Obviously, thatâs not what the Australian
Government want.
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They want the opposite.
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Consequently, weâve found ourselves in a
situation where interest rates have steadily
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been going down over the last 30 years.
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Why?
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To keep house prices inflated.
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As interest rates go down, house prices go
up.
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And thatâs exactly whatâs happened over
the same time period.
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This is why inflation data does not include
housing, at least, not in its entirely.
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The system is being manipulated by the powers
that be to keep Australian house prices at
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some of the most expensive and unaffordable
levels in the world.
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This keeps rich people rich.
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This keeps you in debt.
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And when youâre in debt, youâll keep working
in a job that you probably donât like, which
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makes you a good little citizen who does what
theyâre told.
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And thanks to all this government manipulation
that keeps house prices higher than they should
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be, thatâs why I titled this video, âHouse
Prices Are a Conâ, because they are.
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And thatâs all I have to say on this matter.
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Thanks for watching.
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