House price inflation measures

Email to the Office for National Statistics, 18 April 2007:

I understand that your standard RPI/CPI inflation measures do not include house prices although they do include the cost of mortgage payments. Do you have a paper that justifies this position, which surely gives a false indication of the real costs for many people.

A look at the house prices figures on your site indicates that they have generally risen by significantly more than the usual inflation figures. (How do house prices increases compare to average income increases?) While some of the cost of a house may be financed by other capital (such as money from parents), surely the typical
new mortgage cost has risen dramatically.

Do you increase your mortgage figure or weighting regularly? Have you done an analysis to determine what proportion of income is spent on mortgages by a range of
people.

Using your house price figures, people with a 1986 £36k mortgage will have a relatively low mortgage repayment compared to say a £204k mortgage taken out in 2006. I doubt that income has risen by a similar amount.

Having an inflation figure that has a better allowance for house price inflation would seem to be in order.

Do you have a general view on whether house price inflation is good for the country?

Do you have any sort of assessment of how much recent mortgagees are susceptible to interest rate rises?

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Reply 25 April 2007:

You ask about the inclusion (or lack of inclusion) of house prices in the
RPI and CPI.

RPI does include, as you state does include house prices indirectly through
mortgage interest payments.

It also includes house prices indirectly through other items including
depreciation and rental costs.

The details of the rational behind the method of inclusion of housing costs
is given in our Technical Manual section 7.4.4 (Treatment of Housing
Costs).

The Technical Manual is accessible on the internet via the link:

http://www.statistics.gov.uk/statbase/product.asp?vlnk=2328

The first 2 paragraphs of this subsection are:

The treatment of owner-occupied housing is one of the most difficult
issues faced by compilers of
consumer prices indices. A number of alternative conceptual treatments
exists, and the choice
between them can have a significant impact on the overall index,
affecting both weights and, at least,
short-term measures of price change. The absence of any firm consensus
concerning the appropriate
treatment of such costs, both in the UK and international contexts,
partly reflects the fact that national
consumer price indices like the RPI are often constructed to serve
several distinct purposes, from
monitoring the economy to adjustment of incomes or state benefits.
National housing market
structures and of course practical measurement issues are likewise
important considerations.

A RPI Advisory Committee last considered the various options for the
treatment of owner-occupier
costs in 1992-94 (Cmd 2717). The Committee concluded that mortgage
interest payments, first
introduced into the RPI in 1975 replacing an equivalent rents approach,
should continue to represent
the current cost to home-owning index households of occupying the
dwelling and so acquiring housing
shelter services (alongside a rents component for tenants). Repayments
of mortgage capital are
excluded so as to preserve the distinction between consumption and
investment expenditure. The
Committee also recommended that a new 'depreciation' component for
shelter costs should be
introduced to represent the ongoing costs homeowners face in maintaining
the standard of their
properties.


I hope the above together with the explanations in the rest of 7.4.4 may
answer many of your questions.

On the questions:

Do you increase your mortgage figure or weighting regularly ?

The answer to this is 'yes'. The average house price used in this
calculation is updated monthly and the weighting updated annually.

Have you done an analysis to determine what proportion of income is spent
on mortgages by a range of people?

The answer to this is 'yes' as is explained in our weights article
accessible via the link:

http://www.statistics.gov.uk/cci/article.asp?id=1545

The relevant section of the above article is:

Weights for the costs of owner-occupation, comprising mortgage interest
payments and
depreciation, are not based on EFS expenditures. The weight for
depreciation is calculated
using National Accounts data to estimate a rate of depreciation for
household sector
dwellings, which is applied to the average house price, excluding land,
to give a notional
annual cost of depreciation. The weight for mortgage interest payments
is based on a
modelled mortgage incorporating both repayment and endowment components
over an
average 23 year term. Each of these is updated annually and expressed in
terms of average
weekly expenditure.

On your last 2 questions:

Do you have a general view on whether house price inflation is good for
the country?

Do you have any sort of assessment of how much recent mortgagees are
susceptible to interest rate rises?

I have to say that the above 2 questions lie outside the scope of our work;
in the ONS we are concerned only with the methodology for and the
calculation of the various indices.

I hope the above has been of some help, but if anything here is not clear
or you have any other questions, please feel free to contact us further,

Best regards,
John Bailey