In New Zealand, where sensible policies control Covid-19, monetary policy will now take into account soaring house prices – something the Federal Reserve in the US has rejected
Rising house prices are not counted directly in the consumer price index, which uses a convoluted “calculated rent” system to calculate the cost of housing. That accounts for nearly a quarter of the CPI, the most-followed gauge of US inflation. But as discussed earlier in this column, this understates the sharp rise in housing costs
On the second day of his semiannual Congressional testimony, Fed Chair Jerome Powell was asked Wednesday on the subject by Rep. French Hill, R-Ark. Bringing up topics closely related to the economy and monetary policy, he offered a welcome respite from the typical speeches of his fellow inquisitors on the House Financial Services Committee and their counterparts on the Senate Banking Committee the day before.
Hill noted that, along with the commodity rally, residential real estate has surged. But, he continued, the “calculated rent” measure used by the Bureau of Labor Statistics increased by about 3% (perhaps at an annual rate).
“I never bought it, I don’t know if you ever bought it,” he continued. “But if you look at the existing housing prices, I think they have gone up by 12 [%], new house prices rose 8%. Is that what you are focusing on, namely the rent that counts, because it is around 25% of the CPI, how do you see that? ”
Like any good central banker, Powell wants both. While stressing stable prices are half of the Fed’s mandate (along with maximum employment), he’s trying to explain the soaring house prices, which Hill underestimates. The average selling price of existing homes rose 14.1% in January from a year earlier, compared to 12.6% in December.
Powell insists that the surge is only temporary, partly due to the rush to buy single-family homes to avoid city lockdowns and have room to work at home. He also mentioned in passing that low interest rates contributed to the housing boom.
But inflation expectations remain well anchored, the Fed chief continued, and that’s what matters. And he suggested house prices will level off.
Joseph Carson, former chief economist at AllianceBernstein, has been a staunch critic of the low cost of housing in the measure of inflation. In hers the latest LinkedIn blog Post, he points out that the BLS data shows the rent paid for the main residence exceeds the calculated rent of the house occupied by the owner by a cumulative 20% over the past two decades.
More homes are being rented, and at higher rents, write Strategic economists Don Rissmiller and Erica Halie Comp. That’s not surprising given the success of such a company
(ticker: INVH), which has consolidated a fragmented business by renting single-family homes.
At the same time, the apartment-to-house exodus has slashed rents, which put pressure on the CPI. It also causes a spike in the price of single-family homes, which are not counted directly in the inflation gauge.
In New Zealand, however, they see through this crap. Treasury Secretary Grant Robertson on Thursday steer Reserve Tiresk to consider the impact of housing in setting monetary and financial policy, Bloomberg reports. The government aims for “more sustainable house prices,” to reduce investor demand for existing homes to increase affordability for first-time buyers.
In the US, an obvious effect of the Fed’s super-stimulative policies has been the boom in house prices that has shut out many first-time buyers who have lost bids by more eligible competitors. Not only did the central bank push short-term interest rates near zero, the central bank continued to buy $ 120 billion in securities a month, including $ 40 billion in mortgage agency securities.
Perhaps the Fed could shift its purchases from mortgages to all Treasuries to curb long-term increases in Treasury yields, Strategic economists wrote in a research note. As a result, the central bank could declare “the mission has been accomplished” for the fast growing housing market, they said.
For now, however, Fed Powell doesn’t see that the increase in US home prices represents inflation or that their policies are behind it. In New Zealand, my Kiwi cousin knows better.
Write to Randall W. Forsyth at [email protected]