Blanchflower: House price rises reflect unreliable property data

Sir_Humphrey

Blanchflower said the Bank should drop the consumer price index (CPI) and revert to the retail price index (RPI) as its measure on inflation. Unlike CPI, RPI includes house prices and mortgage costs.

This is something that housing bears called for repeatedly during 2006.

Really2

Sir_Humphrey wrote: »

This is something that housing bears called for repeatedly during 2006.

I think only RPIX includes house prices and mortgage costs
RPI I think only covers housing costs not the price.
May be wrong?
But I agree house prices should be in inflation IMHO.

Sir_Humphrey

Really2 wrote: »

I think only RPIX includes house prices and mortgage costs
RPI I think only covers housing costs not the price.
May be wrong?
But I agree house prices should be in inflation IMHO.

RPI includes mortgage repayments. Originally, the MPC were supposed to target RPIX (which excludes mortgage repayment) at 2.5%. In 2003-ish, this was changed to the standard European measure, CPI at 2%. This also excludes mortgage repayments, but is calculated differently to RPIX.

CPI is controversial becasue it allows for consumers switching to cheaper products in the case of high inflation (this is the hedonic adjustment, which is almost always called hedonistic adjustment by the nutter fringe :rotfl:).

Interestingly, RPIX is at 3.8%, which would have been in Governor-letter-writing territory (which was above 3.5%) had this still been the measure. This is not the only time that Mervyn King has had his ink supplies saved by the switch to CPI.

The reason that RPI is not targeted is because a rise in IRs pushes up RPI, so increasing inflation on that measure.

tomterm8

Personally, I find the idea of targeting any single measure of inflation troubling, since they are all statistically quite questionable.

Really2

Sorry made a boob.

RPIX includes house prices not mortgage costs, RPI is the opposite.

does not seem to be a vast difference on CPI and RPIX, looks like house prices are the main tilt on it.
RPI looks the most volatile.

chucky

HammerSmashedFace wrote: »

I think it's commom knowledge that the data is unreliable.

agreed - low volumes skew the prices upwards just like they skewed the prices downwards.
the problem that you have now is that this trend won't be reversed (if it does anyway) unless something major comes along. it's all pointing to a flattening out with a few months negative here and there.

HammerSmashedFace wrote: »

I only have to look on PB at a variety of areas to see that large swathes of the country have seen no rises whatsoever, only in the eyes of the VI is current price trend, reliable, believable or normal.

with respect Ad i'd much rather take notice of an index calculated by the Land Registry than you browsing Rightmove using Property Bee

Sir_Humphrey

tomterm8 wrote: »

Personally, I find the idea of targeting any single measure of inflation troubling, since they are all statistically quite questionable.

Inflation targetting is a policy that is pre-credit crunch, when it was thought that the economy was inherently stable, with only a light touch on the IR lever being needed to keep things on the straight and narrow. It failed because it completely ignored factors such as leverage, bubbles etc. It should be said that inflation targetting was always intended to be over the medium term and taking into account broader objectives. This allowed some wriggle-room as any policy requires some flexibility.

I think a way to improve the policy making would be to not to find some magic wonder-inflation measure, but to have a broader-based mandate for setting IRs. However, the is a political issue with this, as in a democracy an independent policy-making committee really only ought to have a certain amount of lee-way in setting policy.

Perhaps this would require bringing IRs back under Treasury control? After all, the MPC did not prevent another Lawson style boom in the 2000s, which was part of the original idea of bank independence.

Really2

Sir_Humphrey wrote: »

Perhaps this would require bringing IRs back under Treasury control? After all, the MPC did not prevent another Lawson style boom in the 2000s, which was part of the original idea of bank independence.

I think the treasury have done well given there remit. Better than any government give the size of the problem.

House prices were never one of there targets and we all know who set the target.

Conrad

Here in the S/E prices are rising and volumes are up for me. Investors are back with a vengance.

Blanchflower should get his head out those books and come sit with me for a day.

Economists still fail to grasp the the extent to which bricks are replacing pensions - they'll all suddenly latch onto this in about 5 years time

Sir_Humphrey

Really2 wrote: »

I think the treasury have done well given there remit. Better than any government give the size of the problem.

House prices were never one of there targets and we all know who set the target.

The Treasury is the government (it is the Finance Ministry). IRs are currently set by the Bank of England, which is a nationalised non-governmental institution.