In "Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator," Philippe Bergevin points out the CPI has not usefully reflected the rapid run-up in housing prices in recent years. He proposes a new official inflation indicator for monetary policy purposes that would better reflect the prices of houses sold in the market.This is an interesting idea. Especially since, imagine a time when there would be two CPIs: a high one for owners at the peak of the bubble and a lower one for renters. Wonder if that would get people to notice sooner that prices are out of line with fundamentals.
"The use of assumed prices for dwellings rather than actual prices for houses and the inclusion of a mortgage interest component make the CPI less sensitive than otherwise to housing price changes," notes Bergevin. The main concern, he adds, is that the CPI's insensitivity to housing could potentially cause the central bank - reassured by its imperfect indicator that inflation is under control - to keep rates too low for too long.
Thursday, September 13, 2012
Two CPI proposal, one for owner-occupiers
What Really is Happening with Housing Prices? The CPI Won't Tell You - C.D. Howe Institute
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3 comments:
Measuring a CPI for recent owners and long-time owners would be different. I think the aversion to including spot asset prices is reasonable. It it turned out the Bank of Canada was measuring and reacting to the wrong thing -- a CPI that does not reflect aggregate prices -- that would squirt out in other ways.
Good point.
I do like the idea of monetary policy reacting *somehow* to growing credit load. Something that creates a counter incentive to what we have now, which is a reinforcing spiral that forces rates lower and lower in response to debt load, not one that acts to reprice debt to reduce consumption of it.
In Canada they have been reacting but not through twiddling rates. They have been trying to kick out effective spreads on the riskiest loans. More changes are coming through countercyclical capital buffer requirements to be implemented over the next year or so. There are also other things they are doing that, if only by accident, are cooling things down. The recent changes to immigration intake and some extra asset freezes under the guise of "terrorism" have caused some confusion in the recent hottest-of-the-hot Canadian markets.
I don't think the Bank of Canada and the federal government are asleep at the wheel; more they need to deal with boosting growth in one area while simultaneously reining in growth in another.
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