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The housing market is aflame in this country but Adrian Orr, the Governor of the reserve bank, says that it's none of his business because his sole remit is to keep inflation under control — which he suggests is actually a little on the low side at 1.4%.
He suggests that this very low figure might force him to pour more petrol on to the housing fire by taking interest rates yet lower — and maybe into negative territory — a place where no developed economy has ever been before.
To someone who is looking at a housing market they cannot reach, or taking on a mortgage larger than their mobile telephone number, this position and justification seems a little bizarre. If housing costs are going through the roof, and as housing now represents the major cost for many households — how can inflation over 2020 still be so low?
The answer is that "inflation" in this country is taken to be the same as the reported monthly or quarterly rise in the consumer price index (CPI). The CPI, like so many other things in this country, now heavily favours the "haves" over the "have not".
More specifically, it excludes the price of land and existing housing. New buildings are included, which makes it a measure of building cost inflation, but the massive speculative input into the housing market is excluded, as an existing house and/or land is considered to be an "investment" rather than a consumable.
This creates issues for the young and less well off.
For someone like me (a have, aged 59) who lives in a home that is bought and paid for, there really hasn’t been that much inflation going on this year — maybe, for me, it is around the 1.4% that Mr Orr cites.
The trouble is that the CPI treats me just the same as the young couple down the road (a pair of have nots, aged 33) who have just paid up, on a 100% mortgage, for a three-bedroom 1930s home that cost them $150,000 more than it would have done last year. For these poor souls, their annual cost of living inflation rate in terms of extra cash that they now have to find out of their income may be 10% or higher.
Statistics New Zealand offer copious information on how it calculates New Zealand's CPI, on its website. It is a fiendishly complex beast, which has evolved and become more complex over an extended period, as a consequence of many inputs — some of which one suspects may be political. Given the example above, one does wonder how closely this index now represents reality as it is experienced by large sectors of this country's population, such as our new homeowners above.
If this was just another government statistic, this would not be too much of an issue, but this one is used to drive monetary policy, as it is the principal yardstick that the Reserve Bank appears to use to direct its decision-making. This makes it a major issue if the CPI "disenfranchises" a significant sector of this country’s citizenry by not properly reflecting their lived reality.
There is a principle known as Occam's Razor, which basically says that simple explanations are better. Perhaps it is time to apply this principle to the measurement of CPI, and instead of attempting to "synthesize" reality by an ever more elaborate set of econometric models, to acquire a direct picture of lived reality by directly surveying a large stratified sample of the households of this country in order to acquire data directly on what they buy/consume and how much it costs from year to year.
While such a measure would not be perfect, it would at least provide a meaningful basis of comparison for the current system for generating the CPI. It would also allow a comparison of how CPI inflation varies between sections of our community such as the haves and have nots— which would provide a well overdue insight for policy makers.
As it would include a far more accurate representation of housing costs, one suspects that its reported rate for CPI inflation for this country in 2020, and for many previous years, would be significantly higher — maybe higher than the Reserve Bank's current target band for inflation. This might give Mr Orr pause for thought as he unscrews the cap on his petrol can, and that can surely only be a good thing for our younger people.
In the end, the shortcomings of the CPI figure used in this country reflect one of the greatest questions that we as a society within New Zealand have to address. Is our housing stock a common good, to be used and enjoyed by the wider community, or is it an investment vehicle to be exploited by a few haves?
■ Robert Hamlin is a senior lecturer in the department of marketing at the University of Otago.