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I understand why we don't include real estate in the CPI. It makes sense, when it is explained to me. I also understand Rent is included in the CPI.

However? I live in Canada . Our Populations Household Debt to Disposable income has been rapidly rising. Our real estate prices in urban centers have also been going up in value very quickly. We have very low interest rates. I also know this same effect is happening in Australia, and I believe Hong Kong.

To me this shows there is a correlation between household debt and rising home prices.

To me this extreme of rising house prices clearly is an example of too much cash chasing too few goods ( houses ).

https://tradingeconomics.com/canada/housing-index

https://tradingeconomics.com/canada/households-debt-to-income

Is there a better calculation that may include some form of rising/falling real estate prices into a consumer price index to show inflation? <-- this is my question

I've also noticed that if you take the median total household income in the Province of BC and you use it in a Canadian Bank mortgage calculator, there is no way a person could afford any home in the Vancouver Region, and the majority of the population lives in Vancouver. So clearly there is a disconnect.

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  • $\begingroup$ I checked our countries unemployment rate, it is 5% ish, I also checked the Canadian workforce participation rate. It shows there are 700,000 less Canadians working now than in 2008. ( Someone had mentioned employment rates ) As many of the homes in my area are held by foreign investors and sit empty, it has caused a housing shortage. So now a 1 bedroom 650 foot apartment costs about 600,000 and a 3 bedroom 1.25m in Vancouver. Median household incomes in Vancouver are only 75k. Since more than 50% of peoples income are going to homes, it should somehow be counted in inflation. IMO $\endgroup$
    – Rahim Khoja
    Jun 21, 2017 at 14:22
  • $\begingroup$ Inflation of housing price will not happen without inflation, cheap loans and artificial curb on supplies. You can track all the economy bubbles back to poor government policies, there is no exception.. $\endgroup$
    – mootmoot
    Jun 21, 2017 at 15:00
  • $\begingroup$ You could develop a CPI measure that includes the implicit rent that owner-occupiers pay themselves for living in their own homes (though you should then include this notional expenditure as part of their notional income too) if only as a opportunity cost forgone when they do not rent to others. Presumably rents in general have some relationship to property values and perhaps to interest rates. $\endgroup$
    – Henry
    Oct 23, 2023 at 15:23

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You may correlate between household debt and rising home price, but correlation does not denote causation. In the scenario of property bubbles, Banks allow over-leverage with all sort of facilities will also trigger artificial demands for flipping. When the housing bubble burst, the tide will change people may be in debt with a devalued house.

Here are a few important factors affect the housing price.

  • Employment rates and income level
  • Utilities and facilities
  • Government policies and speculation curbing effort
  • Supplies and demands (locations, scarcity, market openness )
  • Ease of loan facilities(low interests rate, relax loan criteria, low cost, etc)
  • Inflation, i.e. expansion of government money printing machine

It is possible to define a clear CPI when you interconnect all the above factors, but the information is not free and clear. At the moment, there is no good way to produce a reliable housing price index.

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  • $\begingroup$ So what you are saying is that the Vancouver Housing Market is a bubble. I agree, but as a resident, I am now going to be in the top 20% of earners in Canada, yet I can only afford a 1 or 2 bedroom basement apartment. Something seems wrong to me. When the bubble pops its going to destroy peoples lives, then there will be no jobs. It just seems to me, to bypass real estate bubbles, if the rising cost of real estate was included, the inflation rate would be above 2%. Governments would act to cool the market. $\endgroup$
    – Rahim Khoja
    Jun 21, 2017 at 14:30
  • $\begingroup$ @Canadian_Republican I just say "correlation does not denote causation". $\endgroup$
    – mootmoot
    Jun 21, 2017 at 14:54
  • $\begingroup$ I'm going with this answer! $\endgroup$
    – Rahim Khoja
    Jun 22, 2017 at 15:50
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House price increases lead to increases in wealth for homeowners and increases in rental payments for renters. Thus, unlike for consumer products of the CPI like vegetables, milk, cheese, meat, or toothpaste for which the welfare impact of the increase of the price is clearly negative, the welfare impact of house price increases is ambiguous. In many countries the homeownership rate is greater than 50%, hence the median household tends to experience pretty significant increases in wealth in hot markets.

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  • $\begingroup$ So increases in housing prices benefit homeowners, but increases in dairy prices do not benefit farm owners? $\endgroup$
    – Giskard
    Jun 21, 2017 at 8:29
  • $\begingroup$ House price increases lead to increases in wealth. Is this mean, if a 3rd world nation simply inflates house price by 1000x folds, their citizen will be wealthier? $\endgroup$
    – mootmoot
    Jun 21, 2017 at 9:25
  • $\begingroup$ @denesp in the case of housing this is a first order problem. There is no other product that is owned by 50-70% of households. $\endgroup$
    – goingaround
    Jun 21, 2017 at 10:48
  • $\begingroup$ @mootmoot value added calculations (for GDP growth purposes) include the implicit rent that an owner occupier would pay if he were renting the same housing unit. $\endgroup$
    – goingaround
    Jun 21, 2017 at 10:50
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    $\begingroup$ @goingaround I think you didn't get my point on bubbles. A relax property leverage regulation can easilty pump to unrealistic level, that is no different that the tulip mania. $\endgroup$
    – mootmoot
    Nov 6, 2019 at 8:57

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