4 ms·

How do you speak clearly and plainly about these topics? It's factually true housing prices aren't included in the CPI, but it's not easy to explain why and how

by em500 4y ago

How do you speak clearly and plainly about these topics? It's factually true housing prices aren't included in the CPI, but it's not easy to explain why and how replacing it with the somewhat abstract notion of housing services, estimated by owner equivalent rent is conceptually superior.

randomdata 4y ago
I would say the easiest way to explain it is, as implied by the "C", that CPI is intended to track consumption. Houses aren't normally consumed. Your house a decade from now is expected to be, more or less, the same house you purchased originally. You expect, more or less, to be able to sell it for at least as much as you paid for it originally. Whereas a consumable good, like food, is used up once you eat it and then you have to buy it again. Housing services are more like food. They are consumed. You use it up, to some meaning of use, and then you have to eventually buy it again to use it again. However, I'm not sure that's the struggle people have. From what I observe, they question if CPI is the best metric for measuring inflation, not whether or not durable assets should be considered consumables.
- throwaway_1928 4y ago
  > Houses aren't normally consumed. That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.
  - sokoloff 4y ago
    The monthly/annual use of a space to shelter is the service that is being consumed. The perpetual right of ownership of that space to shelter is not being consumed. I don't think the CPI is meant to capture people's perception of how expensive things are. If their perception differs from the reality of what they're consuming, it's more important for CPI to track the consumption than the perception. "The CPI is wrong because it doesn't match people's perception" doesn't make much sense to me.
  - throw0101a 4y ago
    > That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are. Taken into account, at least in Canada: > In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses. > Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?" * https://www.statcan.gc.ca/en/blog/cs/shelter-cost https://www.statcan.gc.ca/en/blog/cs/shelter-cost See notes on 2021: > The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021. > The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements. * https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220119b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...
  - randomdata 4y ago
    > greatest one time ... expense That's the problem with house prices, regardless of whether or not you think they should be included in CPI, being that the average person is likely to only buy one or two in their life, leaving very little data about how their perception has changed over time. The best reason for choosing a measure of consumables is that they are purchased frequently by most people, providing information about how perceptions are changing on a regular basis. > has the greatest impact on their perception of how expensive things are. That would be more significant if we were talking about cost of living, but since we're talking about inflation, the actual goods selected in the basket don't matter all that much. The basket just has to be large enough to filter out the noise of individual products that have increased in value at a rate faster than the currency (or vice versa). And as it pertains to Canada, housing has appeared to be especially noisy of late, making it a poor choice for tracking inflation even ignoring all of the other problems with it.
- Rury 4y ago
  >they question if CPI is the best metric for measuring inflation, not whether or not durable assets should be considered consumables Right. Inflation is supposed to be a measure of erosion in purchasing power. Why should we leave out durable assets (which are purchasable things) from that measure and only consider consumable things? I get that's not CPI's intended purpose, but then why do people use it for defacto inflation?
  - sokoloff 4y ago
    An oil well, a farm, an ounce of gold, and a share of $AAPL are also durable assets and purchasable things. Should they be included in CPI as well?
  - randomdata 4y ago
    Certainly if something is purchased infrequently or by few people it will not provide enough data to learn how about how purchasing power has eroded. Houses are a poor fit no matter how you slice it as the typical person will buy very few in their lifetime, with often decades between purchases. We like to track inflation on a monthly basis. That requires things that most people purchase on much more regular schedule to see how their behaviour is changing on a regular schedule.
throw0101a 4y ago
> How do you speak clearly and plainly about these topics? Housing prices are not considered in the CPI ("cost of living") because houses are mostly an asset. Cullen Roche has had some good stuff on the topic: > House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance). * https://www.pragcap.com/forum/topic/assflation/#postid-2165 https://www.pragcap.com/forum/topic/assflation/#postid-2165 * https://web.archive.org/web/20210929154549/https://www.pragcap.com/forum/topic/assflation/ https://web.archive.org/web/20210929154549/https://www.pragc... > The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. […] > Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs. * https://www.pragcap.com/should-house-prices-be-in-the-cpi/ https://www.pragcap.com/should-house-prices-be-in-the-cpi/ The "C" in CPI stands for consumer. Houses aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live. 'Shelter' is considered in the CPI generally though: * https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc-eng.htm https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc... For the homeowners' replacement cost, at least in Canada: > In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses. > Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?" * https://www.statcan.gc.ca/en/blog/cs/shelter-cost https://www.statcan.gc.ca/en/blog/cs/shelter-cost See notes on 2021: > The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021. > The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements. * https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220119b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...
mywittyname 4y ago
I'd say, "the cost to house ones family is included in CPI calculations." That's clear and accurate. Focusing on subtle technical differences is not helpful for laypeople. Consider if you had a tire that kept going flat, so you take your car to the mechanic and tell them, "something is wrong with my wheel" then having them come back and say, "no there isn't." Because, technically to the mechanic, tires are the rubber part and wheels on the metal part, and there is nothing wrong with the metal part. That's what people are doing by saying "house prices aren't included" in the CPI. While technically correct, the implication to normal people is that the costs associated with shelter are completely omitted from the CPI.

by em500 4y ago

randomdata 4y ago

I would say the easiest way to explain it is, as implied by the "C", that CPI is intended to track consumption. Houses aren't normally consumed. Your house a decade from now is expected to be, more or less, the same house you purchased originally. You expect, more or less, to be able to sell it for at least as much as you paid for it originally. Whereas a consumable good, like food, is used up once you eat it and then you have to buy it again. Housing services are more like food. They are consumed. You use it up, to some meaning of use, and then you have to eventually buy it again to use it again. However, I'm not sure that's the struggle people have. From what I observe, they question if CPI is the best metric for measuring inflation, not whether or not durable assets should be considered consumables.

throwaway_1928 4y ago
> Houses aren't normally consumed. That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.
- sokoloff 4y ago
  The monthly/annual use of a space to shelter is the service that is being consumed. The perpetual right of ownership of that space to shelter is not being consumed. I don't think the CPI is meant to capture people's perception of how expensive things are. If their perception differs from the reality of what they're consuming, it's more important for CPI to track the consumption than the perception. "The CPI is wrong because it doesn't match people's perception" doesn't make much sense to me.
- throw0101a 4y ago
  > That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are. Taken into account, at least in Canada: > In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses. > Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?" * https://www.statcan.gc.ca/en/blog/cs/shelter-cost https://www.statcan.gc.ca/en/blog/cs/shelter-cost See notes on 2021: > The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021. > The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements. * https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220119b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...
- randomdata 4y ago
  > greatest one time ... expense That's the problem with house prices, regardless of whether or not you think they should be included in CPI, being that the average person is likely to only buy one or two in their life, leaving very little data about how their perception has changed over time. The best reason for choosing a measure of consumables is that they are purchased frequently by most people, providing information about how perceptions are changing on a regular basis. > has the greatest impact on their perception of how expensive things are. That would be more significant if we were talking about cost of living, but since we're talking about inflation, the actual goods selected in the basket don't matter all that much. The basket just has to be large enough to filter out the noise of individual products that have increased in value at a rate faster than the currency (or vice versa). And as it pertains to Canada, housing has appeared to be especially noisy of late, making it a poor choice for tracking inflation even ignoring all of the other problems with it.
Rury 4y ago
>they question if CPI is the best metric for measuring inflation, not whether or not durable assets should be considered consumables Right. Inflation is supposed to be a measure of erosion in purchasing power. Why should we leave out durable assets (which are purchasable things) from that measure and only consider consumable things? I get that's not CPI's intended purpose, but then why do people use it for defacto inflation?
- sokoloff 4y ago
  An oil well, a farm, an ounce of gold, and a share of $AAPL are also durable assets and purchasable things. Should they be included in CPI as well?
- randomdata 4y ago
  Certainly if something is purchased infrequently or by few people it will not provide enough data to learn how about how purchasing power has eroded. Houses are a poor fit no matter how you slice it as the typical person will buy very few in their lifetime, with often decades between purchases. We like to track inflation on a monthly basis. That requires things that most people purchase on much more regular schedule to see how their behaviour is changing on a regular schedule.

throw0101a 4y ago

> How do you speak clearly and plainly about these topics? Housing prices are not considered in the CPI ("cost of living") because houses are mostly an asset. Cullen Roche has had some good stuff on the topic: > House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance). * https://www.pragcap.com/forum/topic/assflation/#postid-2165 https://www.pragcap.com/forum/topic/assflation/#postid-2165 * https://web.archive.org/web/20210929154549/https://www.pragcap.com/forum/topic/assflation/ https://web.archive.org/web/20210929154549/https://www.pragc... > The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. […] > Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs. * https://www.pragcap.com/should-house-prices-be-in-the-cpi/ https://www.pragcap.com/should-house-prices-be-in-the-cpi/ The "C" in CPI stands for consumer. Houses aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live. 'Shelter' is considered in the CPI generally though: * https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc-eng.htm https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc... For the homeowners' replacement cost, at least in Canada: > In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses. > Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?" * https://www.statcan.gc.ca/en/blog/cs/shelter-cost https://www.statcan.gc.ca/en/blog/cs/shelter-cost See notes on 2021: > The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021. > The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements. * https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220119b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...

mywittyname 4y ago

I'd say, "the cost to house ones family is included in CPI calculations." That's clear and accurate. Focusing on subtle technical differences is not helpful for laypeople. Consider if you had a tire that kept going flat, so you take your car to the mechanic and tell them, "something is wrong with my wheel" then having them come back and say, "no there isn't." Because, technically to the mechanic, tires are the rubber part and wheels on the metal part, and there is nothing wrong with the metal part. That's what people are doing by saying "house prices aren't included" in the CPI. While technically correct, the implication to normal people is that the costs associated with shelter are completely omitted from the CPI.