Some prices go up and some prices go down. Some prices make it into the news and public discussion and others sit silently in the background.
Electricity and petrol prices are regularly discussed. Everyone has a theory and a villain as to why they seem to be endlessly rising. Other prices are discussed because they don’t go up. Discussion about cheap milk regularly breaks out.
Other prices sit quietly in the background. While some might be amazed that milk prices didn’t rise in eight years, spare a thought for manufacturers of clothing and footwear. These products are actually cheaper today than they were in 1998. That’s no increase in about 20 years.
And they’re not the only prices to have gone down. Household furnishings and equipment are also lower today than they were about 20 years ago.
While we lament every increase in our electricity bill, there are some large price increases that rarely attract a mention. Since 1998, tobacco has gone up in price more than anything else, mainly because of the increase in tax. Tobacco products have increased fivefold in price since 1998, compared to electricity, which has tripled, and the Consumer Price Index (CPI), which has increased by 70 per cent. Of course, increasing tobacco prices is a policy objective designed to cut smoking rates and improve health outcomes.
With so many prices of different products in different categories, it can be difficult to keep up. So we tend to focus our attention on the price of things that are most discussed, such as electricity, petrol and milk.
In this article, I focus on the cost of housing – not just the cost of buying a house, but the broader costs of owning a home.
To do this, I’m going to construct a new category of prices that I’ll call Broad Housing Costs (BHC). This will include:
- current housing costs, which include rents, the cost of building a house as well as rates and other taxes. (Importantly, it does not include mortgage payments, buying existing housing or the land the house is on)
- domestic fuel and power, which includes various utilities such as electricity, gas and water
- household furnishings and equipment, which include such things as furniture, household textiles, appliances, utensils and tools
- household services and operation, which include cleaning and maintenance products as well as household services such as cleaners and gardeners.
Together, this new price index will give us an insight into the cost of running a house and how that has changed over time. One way to look at our new category is to compare it with the CPI.
The figure below does just that. Starting in June 1998, it plots increases in the CPI with increases in the cost of owning and running a home.
From 1998 to December 2018, the CPI increased by about 70 per cent while BHC increased by a slightly larger 78 per cent. Between 1998 and 2009, the two costs increased by roughly the same amounts. In late 2009, BHC increased in price faster than the CPI and has stayed above the CPI since then.
What is driving the small difference between the CPI and BHC can be seen in the next figure, which breaks up BHC into its four categories. It shows that household furnishings and equipment as well as household services and operation are running below CPI and current housing costs and domestic fuel and power are running above CPI. The net result is BHC is growing at slightly faster than CPI.
The increase in domestic fuel and power after 2008 is striking. This is in large part driven by electricity and there are three phases to the price increase.
The next figure just looks at electricity and I have highlighted (in red) the period when the carbon price was put in place in 2012.
We can see that electricity prices were on the rise long before the carbon price came in. This was driven by poor regulations that allowed for what became known as the ‘gold plating’ of the network. This was where electricity distribution and transmission companies were widely criticised as having over-engineered the network in order to increase prices and earn bigger profits.
The introduction of the carbon price continues the trend of increasing prices. Its repeal decreased prices slightly, but it highlights that even without the carbon price, electricity prices would have continued to rise.
The most recent increase in electricity prices has come about because of investment uncertainty caused by the lack of genuine action on climate change.
The other interesting increase has been in current housing costs. These have increased faster than the CPI, but given the huge increase in house prices over the past 15 years, it might surprise people that they haven’t gone up faster.
In relation to current housing costs, the Australian Bureau of Statistics (ABS) measures consumer goods and specifically excludes investments and second-hand goods. This means that the land the house sits on is excluded, because it’s an investment. That is, it’s not a ‘good’ that is used up in consumption, but is instead expected to rise in value over time. The sales of houses that aren’t brand new are also excluded.
Since the house itself should generally go down in price as it gets older, increases in house prices must be because of increases in land prices. This means house price increases are largely excluded from the CPI.
So the running of a home has been increasing faster than the CPI since about 2007 and this is largely due to the cost of building new homes, rents and the increasing price of utilities. Bipartisan effective climate change policy in the energy sector would probably do more than anything else to slow the increased costs of running a home.
This article first appeared in the March 2019 Retirement Affordability Index.
Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.