Vol. 510 No. 4
3 Mr. Hayes asked the Taoiseach the reason the cost of houses is excluded from the consumer price index; the examples, if any, within the EU where this situation arises; the plans, if any, he has to include house prices as part of the CPI; and if he will make a statement on the matter. [20384/99]
The consumer price index covers the mortgage interest cost of purchasing a dwelling. This reflects the increasing cost of houses and also takes into account the impact of changes in interest rates. Most dwellings are purchased with a mortgage paid over time and the interest cost involved forms the bulk of most purchasers' outlay, especially in the early years.
The outright purchase of a dwelling, which is a relatively rare occurrence, is not covered in the index as it is taken to be a form of capital investment rather than a consumption expenditure. Down payment in the case of mortgage arrangements and the capital element of mortgage repayments are excluded for the same reason.
The treatment of owner occupied housing varies in the consumer price indices of other EU member states. Eight countries – Austria, France, Greece, Italy, Luxembourg, Portugal, Belgium and Spain – omit owner occupied housing costs; three countries – Denmark, Germany and The Netherlands – follow the national account's imputed rent approach based on the estimated notional rent that an owner occupier as a landlord would charge himself or herself as a tenant; and the three remaining countries – the United Kingdom, Sweden and Finland – like Ireland take account of mortgage interest payments.
Owner occupied housing costs are currently excluded from the harmonised index of consumer prices, the HICP, compiled for EU purposes. The possibility of agreeing an acceptable harmonised methodology continues to be examined at EU level. The CSO will reconsider its existing approach if an agreed methodology emerges.
Will the Minister of State agree that most members of the public find it difficult to understand that, while house price inflation, particularly in the Dublin area, has exceeded 80 per cent and 90 per cent in the past three years, it has had no effect in terms of the consumer price index? Given that many couples are spending almost a third of their monthly income on their mortgages, will the Minister of State accept that it does not reflect the additional expenditure in the economy as a result of the massive increase in house prices?
When I was on the opposite side of the House I asked the same questions because I believed, and still do, that the CPI does not take into account the outgoings of real people. That is because, traditionally, the purchase of one's home or property was seen by the CSO and successive Governments as a capital rather than a consumption item. To some extent one could argue, as does the CSO, that it is taken into account somewhat because the interest repayments are factored into the calculation. Obviously, as house prices increase, people's borrowing goes up and therefore the interest paid increases. Even though the rate may decrease, the total amount of interest paid increases and that figure is used in calculating the CPI. It is inaccurate to say that the increased price of houses is not taken into the CPI. It is taken into account to the extent that additional interest is paid on higher prices.
First, will the Minister of State confirm that appreciation is not given of the cost of renting in the private rented sector? I understand the CSO use the average figure as given through local authority rents but consideration is not given to the average cost in terms of renting in the private rented sector. Given the massive increase in rents in the private rented sector in recent years, does the Minister agree that a more appropriate mechanism needs to be put in place to reflect that in the consumption figure because it is a consumption figure if people are paying rents on a monthly basis? Second, will the Minister accept that while the affordability level in terms of paying a mortgage has not changed substantially in recent times, there is a difficulty in getting 10 per cent of the total cost of a loan before one can get a mortgage? Many couples now have to borrow from their families, friends and other sources but that is not adequately reflected in the CSO figures. Will the Minister of State address that issue?
Housing accounts for approximately 8 per cent of the overall CPI basket. Within that housing account, mortgage interest accounts for 3.6 per cent, rents make up 1.75 per cent, local authority charges make up 0.3 per cent, house insurance is 0.7 per cent and repairs and decorations make up 1.63 per cent. The items the Deputy mentioned are factored into the CPI through the housing accounts element. I acknowledge the Deputy's second point about the cost of housing. Discussions are taking place at EU level on how we can better harmonise the way we account for housing costs in the CPI. Only four countries – the United Kingdom, Finland, Sweden and Ireland – take mortgage interest into account but eight countries omit housing costs, so perhaps we are more advanced than most countries on this one.
One of the reasons they do not do that—
We must have questions.
—is that there is a greater number of people in the private rented sector in those countries. Dr. Bacon, the Government's economic consultant in this area, proposed that a uni fied system, called the user cost of housing system, would be employed in terms of assessing the true cost of owning a home over a period of time.
Has the Minister of State or his Department considered going down this avenue?
The CSO uses the ESRI-Irish Permanent house price index to establish the current level of new home loans at current prices. The Department of the Environment and Local Government has a number of indices which it uses to measure house prices, which are published from time to time. That has not been taken up by the CSO as part of the CPI discussions at this time, but I will raise the matter with it.
Does the Minister of State agree that house price inflation must, inevitably, lead to wage inflation, given the huge increase in house prices of up to 80 per cent over three years? People will obviously demand greater wages as a result.
That is not relevant to this question.
Has the CSO done any research into the possibility of having an index to reflect asset inflation, where a sample of capital items such as houses, land, office accommodation, factories and the replacement cost of schools and hospitals would be measured and published? That would be a very useful background on which to base policy at the present state of our economic growth.
The question relates to the cost of houses.
I agree we should do that. The CSO must be careful in this regard, in that it has traditionally dealt with measuring existing trends in the economy and has avoided getting too deeply into projections because the whole credibility of the CSO is based on producing statistics about what actually happened.
That is what I am suggesting.
I think that is a good idea and I will take it up with the CSO. Organisations such as the ESRI might be better equipped to make projections. This might push the CSO in a different direction, which we would need to think about. However, it is not a bad idea to measure existing assets and I will take that up with the CSO.
May I rephrase my question?
Very briefly.
It is relevant. Does the Minister of State agree it is important that house prices become part of the CPI because of the effect on wage inflation?
I have just answered that question. Traditionally, we have not included the capital elements of mortgage repayments or of purchasing a house in the CPI. That methodology is being considered at EU level.
