6467.0 - Selected Living Cost Indexes, Australia, Mar 2017 
Quality Declaration
Quality Declaration ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 03/05/2017
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WHAT ROLE DOES HOUSING PLAY IN THE CONSUMER PRICE INDEX AND SELECTED LIVING COST INDEXES?
INTRODUCTION The Consumer Price Index (CPI) (ABS cat no. 6401.0) produced by the Australian Bureau of Statistics (ABS) is a high quality, internationally respected measure of household inflation. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services acquired by households who are residents in the eight State/Territory capital cities. The Australian CPI has been developed over many years in consultation with a broad representation of the Australian community, academics and policy departments. The Australian CPI is compiled using prices and methods that align with international statistical standards. The Australian CPI is primarily used as a macro-economic indicator to monitor and evaluate levels of inflation in the Australian economy. The CPI is not designed as a cost of living index. THE ROLE OF HOUSING IN THE CONSUMER PRICE INDEX Housing plays an important role in the calculation of the CPI because 22 per cent of all spending by Australian households is directed towards housing. This data is sourced from the Household Expenditure Survey (HES) and other ABS sources, including the National Accounts. Almost 9 per cent of total spending is directed towards the purchase of a new dwelling, while rents attract almost 7 per cent of total spending. Maintenance and property charges and utilities (including electricity, gas and water) account for 6 per cent of household spending. Of note, land is excluded from the calculation of housing in the Australian CPI. This approach aligns to international statistical standards and the primary purpose of the CPI as a macro-economic indicator. Land is treated as investment not consumption. However, land and dwelling prices of new and established houses are included in the calculation of the ABS Selected Living Cost Indexes (SLCIs) (cat. no. 6467.0). The ABS produces a range of other indexes that are better suited to assessing changes in the cost of living of Australian households. THE ROLE OF HOUSING IN THE SELECTED LIVING COST INDEXES The SLCIs are particularly suited to assessing whether or not the disposable incomes of households have kept pace with prices changes. This is because the underlying concepts and products priced are designed to answer the question ‘by how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in an earlier period?’ Like the CPI, housing plays an important role in the calculation of the ABS SLCIs. In particular, the SLCIs measure the total price of the dwelling (new and established) including land; as well as changes to mortgage interest charges, to determine if housing living costs have changed. MORTGAGE INTEREST CHARGES The SLCIs measure the cost of housing (footnote 1) by measuring the mortgage interest charges that apply to new and established homes. Therefore, mortgage interest charges in the SLCIs reflect both changes in dwelling price and changes in the interest rates that apply to finance the cost of purchasing the dwelling.
Mortgage interest rates: The interest rate charged by a lender on mortgage products plays a significant role in the mortgage payments made by households. In estimating mortgage interest rates, the ABS samples a range of different mortgage products available in the market, including a mix of fixed and variable rate home loan products. (footnote 2) ANALYSIS OF MORTGAGE INTEREST CHARGES The ABS publishes mortgage interest charges in table 3 of the Selected Living Cost Indexes (cat. no. 6467.0) for different Australian households. The ABS has undertaken analysis of mortgage interest charges over the last decade, figure 1 compares mortgage interest charges for Employee households, the RPPI weighted average of eight capital cities and the Reserve Bank of Australia's (RBA) cash rate (averaged across the quarter). Over the last 10 years, to March quarter 2017, mortgage interest charges have fallen -4.7 per cent. Dwelling prices have risen 76.2 per cent between December 2006 and December 2016 (footnote 3); while the cash rate has fallen from a high point of 7.25 per cent in March 2008 to 1.5 per cent in March 2017 (see figure 1). Therefore, for households who have a mortgage (the majority of Australian Employee households), the decline in interest rates has resulted in falls in their mortgage repayment costs. However, this does depend on when the household purchased the dwelling and started their mortgage, as discussed further in figure 2. FIGURE 1: COMPARISON OF MORTGAGE INTEREST CHARGES, THE RPPI AND THE RBA CASH RATE Figure 2 shows that for Employee households (the majority of mortgage holders) their overall out–of–pocket expenses are impacted significantly by mortgage interest charges. In earlier periods when interest rates were at high levels (compared to now), Employee households experienced higher levels (compared to the CPI) of out–of–pocket expenses. However, over the past five years, with the steady fall in interest rates, Employee households have seen their overall out–of–pocket expenses fall below the increases seen in the CPI. FIGURE 2: COMPARISON OF MORTGAGE INTEREST CHARGES, THE CPI AND EMPLOYEE HOUSEHOLDS LCI CONCLUSION The CPI produced by the ABS is a high quality, internationally respected measure of household inflation. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. The Australian CPI is primarily used as a macro-economic indicator to monitor and evaluate levels of inflation in the Australian economy. The CPI is not designed as a cost of living index. Housing plays an important role in the calculation of the CPI and SLCIs; however, the CPI excludes land, as land is treated as investment not consumption. Land and dwelling prices of new and established houses are included in the calculation of the SLCIs. The SLCIs are the most appropriate measure to determine if the cost of living of Australian households has changed over time, particularly if assessing housing costs. That is because the SLCIs are responsive to the key factors for the out–of–pocket expenses of households on housing: the price of the dwelling (including land); and the change in the mortgage interest charged. Over the last 10 years to March quarter 2017, mortgage interest charges have fallen -4.7 per cent. Therefore, for households who have a mortgage depending on when the household purchased the dwelling and started their mortgage, the decline in interest rates has resulted in falls in their mortgage repayment costs, as reflected in the SLCIs. This is particularly evident in Employee households, who are the majority of mortgage holders. FOOTNOTES 1 Defined as Owner Occupied Housing (OOH), this removes housing for the purpose of investment only. <back 2 Products that apply to investment loans are excluded from the calculation. This ensures the data on interest rates only applies to mortgages for owner-occupier purposes. <back 3 The RPPI publication has a one quarter lag compared to the CPI and SLCIs, March quarter 2017 will be released on 20 June 2017. <back Document Selection These documents will be presented in a new window.
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