Introduction
There is a growing chorus of voices arguing that Australia's Consumer Price Index is broken. The CPI, they say, fails to capture the real cost of living because it excludes house prices – the single largest purchase most Australians will ever make. The frustration is genuine. The lived experience of millions of Australians – particularly younger ones, renters, and aspiring first home buyers – diverges sharply from what the headline inflation number suggests. When the Treasurer announces that inflation is under control and real wages are growing, people who cannot afford to buy a home, or who are watching mortgage repayments consume an ever-larger share of their income, are understandably sceptical.
But the argument that the CPI should be reformed to include house prices, land costs, or mortgage repayments rests on a fundamental confusion about what housing affordability actually is. Housing is not one problem. It is three distinct problems, each driven by different forces, each requiring different policy responses, and each moving in different directions in response to the same policy lever. No single price index can combine all three in a way that remains conceptually coherent, policy-usable, and suitable as a monetary target – and trying to force them into one would produce a measure that misleads more than it illuminates, while damaging one of the most important instruments in Australia's macroeconomic framework.
Underlying the whole debate is a confusion between two things that are not the same: a headline indicator of lived economic pressure, and a target variable for monetary policy. The public wants the first. The Reserve Bank needs the second. Forcing a single number to do both jobs is the source of most of the confusion – and it cannot be resolved by reforming the CPI, because the two purposes are structurally in tension.
Let's start with the three housing affordabilities.
Three Distinct Housing Affordability Problems
Housing affordability in Australia has three dimensions that are too often collapsed into a single undifferentiated grievance.
Purchase affordability is the entry problem: the growing gap between dwelling prices and household incomes that makes accumulating a deposit increasingly impossible for households that do not already own property. It is not a consumer price problem. It is a balance-sheet access problem – a flow-versus-stock mismatch in which wages accumulate gradually while asset prices can rise faster than savings can keep pace.
The drivers are structural. Dwelling prices in Australia are overwhelmingly a land price story – the value of the structure itself has been broadly flat relative to GDP for three decades, while land values have tripled relative to the size of the economy. That reflects planning regimes, zoning restrictions, and infrastructure constraints that limit supply in locations where people actually want to live. Tax concessions for property investors compound the problem by directing capital toward existing stock rather than new supply.
Because purchase affordability is fundamentally a land use gatekeeping by local government problem, no price index can adequately describe it – and no central bank instrument can fix it. Rising house prices transfer wealth from non-owners to owners. That is a political economy question, not an inflation question.
Repayment affordability is the servicing problem: the burden of mortgage repayments on households that have already entered the market. This is directly driven by interest rates and the size of the loan. It is the dimension the Reserve Bank most directly influences through monetary policy, and – as the 2022-23 tightening cycle demonstrated with brutal clarity – it can deteriorate very rapidly when rates rise. Repayment affordability is the dimension the Living Cost Index for employee households captures this in aggregate, because it includes mortgage interest charges. Nonetheless, the impact on purchasing households is not fully reflected in this Index, many employee households do not have a mortgage.
Rental affordability is the access problem for the roughly one third of Australian households who rent: the cost of renting relative to income, driven primarily by vacancy rates and the supply of rental stock. In a tight market, higher interest rates may place upward pressure on rents indirectly – by affecting investor supply decisions and reservation prices – but rental affordability is driven primarily by vacancy, stock, and the bargaining conditions between landlords and tenants in a market where social housing is structurally inadequate and supply cannot expand quickly.
The post-COVID immigration surge – net overseas migration collapsed to near zero in 2021 before rebounding to over 500,000 per year by 2023 – placed extraordinary pressure on a rental market that had no capacity to respond at that speed. Supply cannot be built fast enough to absorb a demand shock of that magnitude in the short run, regardless of planning settings. Net overseas migration has since moderated to around 300,000 per year, but the stock deficit it created will take years to unwind. A touch over 85 per cent of our population growth comes from immigration, the remainder from natural increase (births minus deaths).
These Affordabilities are in Tension
These three dimensions are not only distinct – they are frequently in tension, and they respond differently to the same policy interventions. This is the central insight that the debate about CPI reform consistently ignores.
Consider what happens when the Reserve Bank raises interest rates to fight inflation. Repayment affordability deteriorates immediately and sharply for mortgage holders – the 2022-23 tightening cycle produced annual growth in mortgage interest charges approaching ninety per cent, a figure completely outside anything in the prior data.
At the same time, rental affordability comes under pressure as households who cannot afford to buy remain in the rental market longer, intensifying competition for stock that supply constraints mean cannot expand quickly. And purchase affordability? It improves only modestly and temporarily – prices fall somewhat as credit becomes more expensive, but not enough to offset the higher repayment cost facing any buyer who actually tries to enter the market. The deposit hurdle may even increase in real terms as asset prices prove stickier than expected and savings rates are squeezed by higher living costs.
In other words, all three dimensions of housing affordability can deteriorate simultaneously in response to the same monetary policy tightening – even as headline CPI falls, which is precisely what it is supposed to do. The instrument is working. The pain is real. These are not contradictions. They are the expected consequences of tightening policy in a supply-constrained housing market with fifteen years of accumulated asset price inflation to unwind.
No single price index can represent all three dimensions simultaneously, because they point in different directions. An index that includes purchase costs would fall when rates rise – good for purchase affordability – while an index that includes mortgage rates would rise when rates rise – bad for repayment affordability. Any attempt to combine them produces something that moves in a direction determined entirely by the weights chosen – which is to say, by whoever has the political power to choose the weights.
What the CPI Is – and Is Not
The Consumer Price Index is a measure of consumer price inflation in goods and services. It has been used for many purposes over its history – wage indexation, welfare adjustments, contract indexation – but since the adoption of formal inflation targeting in 1993, its primary institutional role has been as the target variable for monetary policy. The Reserve Bank has an explicit mandate to keep inflation, as measured by the CPI, between two and three per cent.
This matters because a monetary policy target needs to measure something the central bank can actually influence through the price of money – the cost of consuming goods and services in the real economy. It cannot simultaneously serve as a comprehensive welfare measure or a gauge of housing market stress. These are different instruments for different purposes, and conflating them creates exactly the kind of confusion that drives the current debate.
Critics are right that the CPI is routinely misrepresented as a general cost of living measure – by politicians, by media commentators, and by institutions that have never invested enough in explaining what the other measures show. But the solution to a communication failure is better communication, not redesigning an instrument to carry a burden it was not built for. The CPI has become the universal public shorthand for economic truth – wages, pensions, budgets, and political claims are all translated through it. So when housing exclusion bites, people experience that as institutional denial rather than technical classification. That is understandable. It is also a reason to communicate better, not to corrupt the instrument.
Measuring the consumption cost of housing is itself genuinely difficult, and no country has solved it cleanly. The ABS uses a net acquisitions approach for owner-occupied housing – tracking the construction cost of new dwellings, excluding land. The logic is that the depreciating structure is a consumption good, like a car, while the land underneath it is a capital asset. The approach has real limitations: it excludes the land component that can represent ninety per cent of purchase price in Sydney, it is a poor proxy for what most people experience as housing cost, and it was relatively slow to capture the surge in housing inflation that post-COVID supply chain disruptions produced.
The United States uses Owners' Equivalent Rent – a survey-based estimate of what owner-occupiers would hypothetically pay to rent their own home. This better approximates the opportunity cost of owner-occupied housing and avoids the volatility of asset prices. But OER is notoriously slow to respond to market changes – during the post-COVID surge it lagged actual housing inflation by more than a year, causing the Federal Reserve to underestimate underlying inflation for longer than it should have. It is also conceptually peculiar: you are imputing a transaction that never happens, between a tenant and a landlord who are the same person.
The United Kingdom uses CPIH, which adds owner-occupiers' housing costs using a rental equivalence approach similar to OER. Canada includes mortgage interest charges directly. New Zealand has moved between approaches. The international picture is one of genuine methodological disagreement, not a clear right answer that Australia has chosen to ignore for political convenience.
The honest position is that measuring the consumption value of owner-occupied housing is intrinsically hard. Every country is patching a problem that has no clean solution. The ABS approach is imperfect; so are all the alternatives. The argument for reform should engage with this complexity, not pretend that adding house prices to the CPI is a straightforward improvement.
Why Reform Would Make Things Worse
Given that the CPI does an imperfect job of capturing housing costs, it is worth asking seriously whether reform could improve it. The answer is no – and for reasons that go beyond the inherent difficulty of measurement.
The feedback loop problem. The most commonly proposed reform – restoring mortgage interest charges to the CPI – recreates exactly the perverse dynamic that led to their removal in 1998. When the Reserve Bank raises rates to fight inflation, mortgage costs rise, the CPI increases, real wages measured against CPI fall, and political and industrial pressure for wage increases intensifies. The instrument and the target become correlated in a destabilising way: the act of fighting inflation makes measured inflation worse. This is not theoretical – it played out in Australia in the late 1980s and contributed to the severity of the 1991 recession. Canada retains mortgage costs in its CPI and manages the distortion partly by relying on core inflation measures that strip out the most volatile components. That is a workaround for a design flaw, not evidence that the design is sound.
Critics note that central banks can use core inflation measures to see through temporary distortions. That is true but insufficient. The headline CPI has institutional significance beyond monetary policy – it feeds into welfare indexation, wage negotiations, and political accountability. A headline CPI that rises when the RBA raises rates would create pressure on all of those mechanisms simultaneously.
The growth constraint problem. If house prices are incorporated into the CPI with any substantial weight, the Reserve Bank becomes effectively mandated to tighten monetary policy when asset markets rise – even when consumption inflation is within the target band. The important distinction here is between asset price movements that reflect genuine financial stability risks and those that simply reflect capital accumulation in a growing economy. The financial stability literature has debated for two decades whether central banks should lean against asset price cycles. But that is an argument about whether and how to adjust the RBA's mandate or its policy settings – not about whether to embed asset prices in the inflation target variable itself. The latter is irreversible and affects every institution that uses the CPI. The former is a judgment that can be calibrated over time through prudential tools and monetary policy settings. Conflating the two leads to the worst of both worlds: a CPI unsuitable as a monetary target, and an asset price problem that remains unaddressed because it has been incorrectly framed as an inflation problem.
The distributional incoherence problem. Rising house prices mean completely different things to different groups. For existing owners they represent wealth accumulation. For renters they are largely irrelevant to direct housing costs. For first home buyers they represent a deepening barrier to entry. An inflation index that rises when existing owners get wealthier – simultaneously making aspiring buyers more frustrated – is not measuring anything coherent. It represents the average of opposing experiences, weighted by household spending patterns that themselves skew toward higher earners.
The weight problem. What share of the CPI should house prices receive? The answer determines the conclusion. Recent advocacy has proposed weights around fifteen per cent – not derived from any principled methodology, but chosen to produce a particular result about real wages. If house prices receive a weight consistent with their actual share of lifetime household spending, the index becomes enormously volatile, driven by a market that can move thirty per cent in a few years. If they receive a weight that smooths this volatility, the measure fails to capture the affordability crisis it was supposedly introduced to reflect. There is no weight that solves both problems simultaneously.
A Note on Motivated Reasoning
It would be naive not to acknowledge that some of the loudest advocacy for CPI reform has explicitly political motivations. Recent reports from the Institute of Public Affairs have argued for including house prices in the CPI with the stated aim of demonstrating that real wages under the current Labor government are lower than they were in 1998.
The standard real wages chart – using the actual CPI as the deflator – shows real wages at around 110 on a base of 100 in 1998. That is, real wages are approximately ten per cent higher than in 1998, despite a significant fall from the 2020-21 peak. The post-COVID real wage squeeze is real, visible, and – as better measures show – even sharper than the CPI-deflated series suggests. It does not need to be manufactured through a bespoke alternative index with an arbitrarily chosen weight.
The methodological problem with the IPA approach is one of construction: an index engineered to produce a predetermined conclusion is not measuring anything. The choice of weight determines the answer. That is advocacy dressed in statistical clothing, not analysis.
The deeper problem is institutional. The CPI's value as a monetary policy anchor depends entirely on its credibility as a technically independent measure. Once the methodology becomes subject to political contestation – once different interests can argue for different weightings to produce different readings of the economic record – the instrument is compromised. The RBA cannot credibly target an inflation measure that governments or their critics have a direct interest in manipulating. The United States learned this in the late 1970s when political discomfort with a CPI driven up by house prices and mortgage rates contributed to the methodological changes that eventually produced OER. Australia should not repeat that experience in either direction.
If the advocates of reform genuinely believed that the LCI tells a more honest real wages story, they would be citing it. They are not – which tells you something important about what this exercise is actually for.
What We Already Have
The most important and under-appreciated point in this entire debate is that Australia already has a rich set of measures that together address the housing cost problem far more honestly than a reformed CPI would. They are simply never reported.
The Living Cost Indexes. The ABS produces Living Cost Indexes for six household types – employees, age pensioners, self-funded retirees, other government transfer recipients, and the combined pensioner and beneficiary index. Unlike the CPI, the LCI includes mortgage interest charges. It directly captures the repayment affordability dimension of housing cost.
Deflating the Wage Price Index against the employee household LCI rather than the CPI tells a modestly but meaningfully different story. The index currently sits at around 108 against a 1998 base of 100, compared to around 110 using CPI. The proportional fall from the 2020-21 peak is larger under the LCI – roughly nine per cent compared to six per cent using CPI – because the LCI captured the full severity of the 2022-23 mortgage cost surge that CPI substantially missed.
It is worth noting that even this understates the impact on individual mortgage-holding households. The LCI averages across all employee households – including renters and outright owners who experienced the rate cycle very differently from recent leveraged buyers. The LCI is a better measure than the CPI for tracking repayment affordability in aggregate, but it smooths over the highly uneven distributional impact of the rate cycle within the employee household group. Not all of the post-2022 pain should be interpreted through the same lens. Households with variable rate mortgages taken out near the peak faced genuine financial stress. Outright owners and long-established owners with small remaining balances were largely insulated. The political narrative of universal pain obscures these differences.
The HFCE Deflator. The Household Final Consumption Expenditure deflator, derived from the national accounts, includes imputed rent for owner-occupiers – treating homeowners as if they were renting from themselves, consistent with standard System of National Accounts conventions. The implicit price deflator for HFCE rents aligns closely with the CPI rents series and tracks rental market conditions, meaning it captures some of the housing dimension that CPI's new dwellings approach misses.
The HFCE deflator is a useful cross-check against CPI for understanding consumption inflation across the economy. But it should not be overstated as a solution. It is derived quarterly with a lag, it is not designed for inflation targeting, it is not intuitive to non-specialists, and it lacks the institutional salience that comes from being the RBA's official target. Its imputed rent methodology also has limitations in a market where the ownership and rental stocks are compositionally different in ways that vary sharply by city, dwelling type, and location. It is a better measure for some purposes – not a substitute for the CPI.
Finance and Wealth Accounts. The national accounts track aggregate household wealth including dwelling values. This captures asset price inflation in the aggregate – the total rise in the value of the housing stock is clearly visible, as is its relationship to household balance sheets. What it does not capture is distribution.
HILDA and the Survey of Income and Housing. The Household, Income and Labour Dynamics in Australia survey and the ABS Survey of Income and Housing provide the closest available picture of housing wealth distribution. HILDA tracks individual households over time, making visible the growing gap between owners and non-owners and the sharp intergenerational shift in ownership rates – home ownership among 25-to-34-year-olds has fallen sharply over three decades. This is the purchase affordability story told in distributional terms. It is compelling. It simply never enters mainstream economic debate.
The Census – with caveats. The Census captures home ownership rates but is increasingly unreliable for this purpose. The growth of adult children living with parents in owner-occupied dwellings means that people are recorded as living in owner-occupied housing without any ownership stake themselves. The Census ownership rate has held up better than the underlying reality of independent ownership – particularly for younger cohorts – precisely because it conflates genuine owners with adult children who may never be able to afford to buy. This makes the demographic shift in ownership rates even harder to measure than it appears.
The picture that emerges from these measures together is clear. Purchase affordability has deteriorated dramatically and structurally over three decades, driven by the intersection of tax incentives, supply constraints, and cheap credit. Repayment affordability deteriorated sharply during the 2022-23 tightening cycle, eased modestly during the brief 2025 cutting cycle, and is deteriorating again following the renewed tightening in February and March 2026. Rental affordability has been under sustained pressure as vacancy rates have tightened and supply has failed to keep pace with demand. These are all serious problems. None of them is caused by the way the ABS constructs the CPI, and none of them would be solved by changing it.
The Anomaly and Its Consequences
Any honest account of the current situation must grapple with the interest rate environment of the past fifteen years. From the global financial crisis through to 2022, the cash rate sat at historically extraordinary lows – near zero for an extended period. This was an emergency policy response that was extended far longer than originally anticipated, as the global economy failed to recover its pre-crisis dynamism and as successive shocks – the European debt crisis, the commodity price collapse, the pandemic – provided repeated justifications for maintaining accommodation.
Standard growth theory – the Solow-Ramsey framework – suggests that in the long run, the real interest rate should approximate the economy's long-run growth rate. For Australia, with long-run real growth of around two to two-and-a-half per cent and an inflation target of 2.5 per cent, this implies a neutral nominal cash rate in the range of four-and-a-half to five per cent.
The secular stagnation hypothesis – which held that demographic and structural forces had permanently depressed neutral rates across advanced economies – has not survived the post-COVID experience. An economy that sustains growth at cash rates above four per cent is not one with a structurally depressed neutral rate. The savings glut thesis, which attributed low rates to excess global savings recycled through developed economy bond markets, similarly struggles to explain the speed and durability of post-COVID normalisation. The post-GFC decade of near-zero rates looks in retrospect less like a new structural equilibrium and more like a prolonged policy response to a specific crisis, maintained too long, with consequences in asset price inflation and distorted household expectations that we are still working through.
There are genuine outliers. Japan has maintained near-zero or negative rates for over three decades, held down by a specific combination of rapid demographic ageing, entrenched deflationary expectations, and distinctive corporate behaviour – cash hoarding and chronic underinvestment – that has no parallel in Australia. Switzerland faces structurally compressed rates for different reasons: persistent safe-haven capital inflows that the Swiss National Bank has largely been unable to offset. These cases show that country-specific structural factors can keep neutral rates genuinely depressed for extended periods. But Australia has none of the features that explain either case – it has stronger demographic dynamics, higher trend growth, a commodity-linked economy with different inflation characteristics, and no history of entrenched deflation. The outliers sharpen rather than weaken the argument that Australia's post-GFC near-zero rates were anomalous and that current normalisation is consistent with what the theory predicts.
This context matters for interpreting the real wages data. The post-COVID real wage peak – visible in both the CPI-deflated and LCI-deflated charts – was partly an artefact of that anomaly. In 2020-21, the CPI briefly collapsed while wages held up, producing a flattering but temporary spike. The subsequent fall is real and has caused genuine hardship. But it needs to be read against a baseline that was itself distorted, and against a rate environment in which mortgage holders who made decisions premised on near-zero rates persisting are now experiencing the consequences of those decisions as rates normalise.
The house price surge of 2020-22 was substantially driven by ultra-low mortgage rates capitalising into asset values. When a thirty-year mortgage is available at two per cent, buyers can borrow – and therefore bid – vastly more than when rates are at five per cent. The price explosion was the predictable result of cheap money meeting constrained supply. The subsequent repayment squeeze was the predictable result of normalisation. None of this required bad policy decisions by households or governments – but the unwinding of a fifteen-year anomaly was always going to be painful, and the pain was always going to be distributed unevenly across the three dimensions of housing affordability.
The political pressure this generates is real and will intensify. An entire generation calibrated financial expectations against a world of cheap credit. When that credit becomes expensive, the sense of betrayal is genuine even if the underlying economics are defensible. It is politically much easier to blame the index than to explain that an extended period of emergency monetary policy inflated asset prices, distorted expectations, and that adjusting back is going to hurt people who made reasonable decisions in good faith. No government will volunteer this explanation. But redesigning the CPI to match the grievance addresses neither the economics nor the lived experience – it merely corrupts the instrument while leaving the problems entirely intact.
What Should Actually Change
The argument here is not that everything is fine. The real wages squeeze has been genuine, the housing affordability crisis across all three dimensions is real and structural, and the failure to communicate what the different measures show has been costly. Here is what should actually change.
The ABS and the RBA should invest seriously in public communication about the full suite of measures available. When CPI data is released, the LCI for employee households should be reported alongside it as a matter of routine – it tells a more complete story about repayment affordability and the lived experience of working households, and it is already being produced. The gap between CPI and LCI is meaningful and informative; it should not be visible only to specialists.
The purchase affordability story told by HILDA and the Survey of Income and Housing – the sharp intergenerational decline in ownership rates, the growing wealth gap between owners and non-owners – should be a standard part of the national economic conversation, cited in budgets and intergenerational reports, not confined to academic journals. The Finance and Wealth accounts should be used more actively in public debate about the distributional consequences of housing policy.
The relationship between the RBA's monetary policy mandate and APRA's macro-prudential tools should be more clearly articulated in public. APRA's serviceability buffers, loan-to-value ratio limits, and lending standards are the appropriate instruments for managing the financial stability dimension of housing – and they operated too loosely during the period of ultra-low rates that inflated the current bubble. Tightening credit conditions through prudential regulation is less blunt than raising rates and does not hit all three dimensions of housing affordability simultaneously.
The actual structural drivers of the purchase affordability crisis – tax concessions for property investors that direct capital toward existing rather than new housing, planning and zoning restrictions that constrain supply in high-demand locations, and inadequate social housing investment – require sustained policy attention that they are not currently receiving. These are hard problems with politically costly solutions. The CPI debate is partly attractive precisely because it offers the appearance of action without requiring any of those solutions.
A broader headline cost-of-living index – perhaps an enhanced version of the LCI – reported routinely alongside CPI would genuinely improve public understanding of what is happening in the economy. This is not the same as reforming the CPI itself. It means using and communicating the tools we already have, while being clear that no single number can summarise the three distinct and often-conflicting pressures that households face in Australia's housing market.
Conclusion
The frustration that drives the CPI reform argument is legitimate. The measures habitually used to describe Australia's economic performance do a poor job of capturing the experience of people locked out of the housing market, squeezed by mortgage repayments, or watching rents consume a third of their income. That is a real failure – not primarily of statistics, but of communication, political will, and policy.
But housing affordability is not one problem. It is three distinct problems – purchase, repayment, and rental – each driven by different forces, each requiring different instruments, and each responding differently to the same policy lever. Any index that conflates consumption costs, financing costs, and asset prices will be operationally dangerous as a monetary policy target, vulnerable to the feedback loops and growth constraints that led to the removal of mortgage rates from the CPI in the first place. Any index that captures one dimension while claiming to represent all three will mislead more than it illuminates.
Australia already has the measurement architecture to describe its housing crisis honestly and in full. The LCI captures repayment affordability. The HFCE deflator captures consumption costs including imputed rent. The Finance and Wealth accounts capture asset price inflation in aggregate. HILDA captures the distributional consequences. The problem is not that the ABS hasn't thought about this – it is that none of these measures reaches the public in the way that CPI does, and that the politicians and journalists who shape economic debate prefer the simplicity of a single headline number to the complexity of the actual situation.
The CPI is a well-established instrument for measuring consumer price inflation. It is being asked to carry a burden it was never designed to bear – to simultaneously serve as a monetary policy anchor, a cost-of-living indicator, a measure of housing stress, and a verdict on the economic record of governments. It cannot do all of these things. Reforming it to try will leave the RBA with a less reliable instrument at exactly the moment it most needs a reliable one.
Fixing the CPI will not build a single house. It will not reduce a single land value, bring a single deposit within reach, or lower a single rent. The three housing crises Australia faces – in purchase, repayment, and rental affordability – have specific causes and require specific remedies. Blaming the index is easier than pursuing those remedies. It is also a way of ensuring they never arrive.
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