Why Your Home Loan Repayments Aren't Included in Official Inflation Figures
For more than a third of Australians, paying off their home mortgage is a significant financial burden. When interest rates rise, as they did this week, banks promptly increase minimum repayments, causing a ripple effect on household budgets. For instance, the average $600,000 mortgage will see payments jump by $90 monthly, according to Canstar. But why aren't these rising payments reflected in Australia's inflation data?
A Request from the RBA
The Australian Bureau of Statistics (ABS) removed mortgage payments from the Consumer Price Index (CPI) in 1997, following a request from the Reserve Bank of Australia (RBA). This decision came after a decade of mortgage payments being included in the CPI. It was part of the ABS's routine review of its index calculation methods, a critical economic indicator.
The technical shift was from an 'outlays' model to an 'acquisitions' model. While the trade union movement and the Australian Chamber of Commerce and Industry provided feedback during the review, the ABS has struggled to locate most submissions, with only the RBA's submission readily available online.
The RBA's submission revealed their intention to exclude mortgage payments. They argued that workers seeking pay raises used the higher figures, including mortgage payments, to negotiate higher wages. The RBA's concern was that this could exacerbate inflation, their primary economic challenge.
In the RBA's words, 'At a time when inflationary pressures are increasing, interest rates are being increased to combat those pressures.' They further explained, 'The interest components of the CPI also rise, adding a short-term impulse to inflation as measured by the headline (or total) CPI.'
Household Pain to Drive Inflation Down
The financial strain on mortgage holders when interest rates rise and their relief when rates fall is a strategic tool for the RBA to manage inflation within its target range of two to three percent. As assistant governor Christopher Kent noted, borrowers often reduce spending to meet higher mortgage payments, slowing the demand for goods and services.
This reduced demand is intended to limit price increases by companies. The RBA asserts that excluding mortgage costs from inflation measures is a global practice, and most countries, including Australia, use alternative methods, such as the cost of building new homes.
Mortgage Costs Cause Financial Stress
When the ABS excluded mortgage payments from the headline inflation figures in 1997, it also introduced cost-of-living indexes that include mortgage interest. For employees, this accounts for nearly 15% of the index, almost matching the weight of the food and non-alcoholic beverage category (around 17%).
The 15% weighting is an average, influenced by renters and those who have already paid off their mortgages. According to Cotality data, paying off a new home loan consumes 45% of median income. However, soaring house prices make this measure less accurate, as average earners struggle to afford average-priced homes in cities like Sydney.
Other indicators highlight the financial strain of large mortgages. Roy Morgan reports that approximately a quarter of mortgage holders are at risk of mortgage stress, totaling around 1,187,000 individuals. While this number has decreased over three years, the market research company predicts that this week's rate hike will push an additional 41,000 mortgage holders into financial distress.
Financial Counsellors Australia noted a 10% increase in calls to the National Debt Helpline last month, with housing stress being a primary concern. Chief executive Domenique Meyrick observed a new demographic of working individuals struggling to keep up with mortgage payments and rising essential costs.
For these individuals, the RBA's inflation calculation views are a minor concern.
