Your mortgage payments are a massive chunk of your budget, yet they don't show up in the official inflation numbers! For over a third of Australians, their home loan is their biggest monthly outgoing. When interest rates climb, like they did recently, banks swiftly increase those minimum repayments. Imagine your average $600,000 mortgage suddenly costing an extra $90 a month – that's a real hit to the wallet!
So, why isn't this significant expense reflected in Australia's headline inflation measurement? It's a fascinating story that goes back to a request from the Reserve Bank of Australia (RBA) in 1997.
At that time, the Australian Bureau of Statistics (ABS) removed mortgage payments from the Consumer Price Index (CPI). This wasn't a random decision; it was part of a regular review of how the CPI, a crucial economic indicator, is calculated. The shift was from what's called an "outlays" model to an "acquisitions" model. Essentially, this means they stopped measuring the cost of paying for something over time (like a mortgage) and started focusing on the cost of acquiring goods and services at a specific point.
But here's where it gets controversial... The RBA's primary reason for this request was to avoid what they termed "distorted signals" in wage negotiations. They argued that when interest rates rise to combat inflation, including mortgage interest in the CPI would artificially inflate the inflation figure. This, in turn, could lead workers to demand higher wages, potentially stoking further inflation. The RBA's 1997 submission to the ABS stated, "At a time when inflationary pressures are increasing, interest rates are being increased to combat those pressures." They believed that including rising interest payments in the CPI would create a "short-term impulse to inflation" that could destabilize the economy.
And this is the part most people miss... While the RBA acknowledged that this also applied when rates went down, the impact on households feeling the pinch is immediate and significant. A graph from the RBA's submission showed that if interest payments had been excluded in 1995, inflation would have appeared to be around 3.5% instead of the reported 5%. The RBA insisted this wouldn't distort the long-term picture, but as the legendary economist John Maynard Keynes famously quipped, "in the long run we are all dead." For those struggling with rising payments today, the long-term view offers little comfort.
It's important to understand that the RBA uses interest rate hikes as a key tool to manage inflation, aiming to keep it within the 2% to 3% target band. When rates increase, borrowers often have to cut back on other spending to manage their mortgage. This reduced demand for goods and services is intended to put a brake on price increases. The RBA points out that excluding mortgage costs from headline inflation is common practice globally, with many countries instead including the cost of building a new home. They also argue that even if mortgage costs were included, they would likely strip them out when making interest rate decisions anyway.
However, for many Australians, these mortgage payments are a very real and substantial financial burden. The ABS did, however, begin producing separate cost-of-living indexes that do include mortgage interest. For employees, these mortgage costs can represent almost 15% of such an index, a figure comparable to the entire food and non-alcoholic beverage category! This 15% is an average, meaning for those with substantial mortgages, the proportion is even higher.
Data from November shows that paying off an average new home loan can consume as much as 45% of median income. While rampant house prices make this measure imperfect, other indicators paint a stark picture of the financial stress. Roy Morgan data suggests about a quarter of mortgage holders, roughly 1,187,000 people, are at risk of mortgage stress. They predict that the recent rate rise could push an additional 41,000 mortgage holders into this vulnerable category.
Calls to the National Debt Helpline have also surged, with housing stress cited as a primary reason for seeking assistance. Chief executive Domenique Meyrick noted a new demographic of people, often in full-time employment, struggling to keep up with both mortgage repayments and the rising cost of essentials. For these individuals, the intricacies of inflation measurement are likely the least of their concerns.
What do you think? Should mortgage interest payments be included in the official inflation figures, even if it complicates interest rate decisions? Or is the RBA's approach justified to maintain economic stability? Let us know your thoughts in the comments below!
