THE LOCAL GOVERNMENT FUNDING AGENCY DEBT TRAP

Local councils are entering rate payers into debt deals that could see them lose their properties even if they are freehold.

THE LOCAL GOVERNMENT FUNDING AGENCY DEBT TRAP

It sounds hard to believe I know but local councils are entering rate payers into debt deals that could see them lose their properties even if they are freehold, because they are using them as security for the borrowing, and not just if your local council gets into trouble but others whose debt you have gone joint guarantor for.

At a time when the Gross National Debt of New Zealand is hurtling toward 1 Trillion dollars, exceeding 153000 dollars for every man, woman and child, as reported by the New Zealand Heralds annual Nation of Debt Report last published May 2024. Due to how much debt servicing is sucking the economic lifeblood out of the economy, every level of society is increasingly facing an impossible funding puzzle, unable to make ends meet.

Like other sectors, local councils facing debt servicing driven price increases handed down to them, can not pass them directly onto rate payers because it would economically cripple them, so they kick the debt can down the road by borrowing more. It is an unsustainable economic model, which by the time the it collapses those responsible wont be able to be held to account and those whose property has been used as security for the borrowing are going to be in for a terrible shock.

In recent times as the insurmountable debt servicing issue has escalated, as interest never sleeps even if the economy needs to, the special debt deals being entered into are offering less cost saving benefit and much greater risk for those whose properties have been used as security without their knowledge by way of proxy consent.

Read on to find out the intricate details of what the Local Government Funding Agency is and what it means for you.

WHO DESIGNED THE LOCAL GOVERNMENT FUNDING AGENCY

The New Zealand Investment Bank, Cameron Partners, that in 2008 became New Zealand affiliate of Rothschilds & CO, implemented the Local Government Funding Agency at the post 2008 global financial crisis Capital Markets Task Force held in New Zealand 2009, which was chaired by the late Rob Cameron (Passed away 2018)

Cameron Partners

https://cameronpartners.co.nz/our-story/#history

Where it all began

Our story began in 1995. Our first partners — Rob Cameron, Murdo Beattie, Ian Dickson, and Nigel Bingham — came together to form an investment bank built on the values of trusted relationships, quality independent advice, and a long-term commitment to the New Zealand market. Our foundation values have endured and guide the way we work today.

Local knowledge, global reach

https://cameronpartners.co.nz/our-story/our-global-alliance/

Rothschild & Co has an extraordinary history spanning over 200 years. They are one of the world’s leading M&A advisors and have an outstanding global network of 1,200 bankers in 60 offices globally.

In 2008 Cameron Partners began its long-running global alliance with Rothschild & Co. Like us, Rothschild & Co is a leading and trusted investment banking firm that values long-term client relationships based on high integrity advice and exceptional client outcomes. We share the same independent, advisory model that focuses on M&A, equity and debt capital markets, and strategic advice.

Our close working relationship with Rothschild & Co means we provide our clients with the best of on the ground local knowledge, and simultaneous access to unrivalled global networks, sector expertise and insights.

Local Government Funding Agency

https://www.lgfa.co.nz/about-lgfa/our-story

Our Story

Several attempts to establish a collective borrowing vehicle for the local government sector in New Zealand were made in the 1980s and 1990s. These attempts ultimately failed, due in part to a lack of strong and unified support from local authorities.

At the Jobs Summit in 2009, another proposal for a local government debt vehicle was put forward. On this occasion, the Global Financial Crisis (GFC) ensured that stronger support for the proposal was forthcoming.

“The GFC focused everyone, including the local authorities, on the capital markets – pricing and security of access in particular.”

Hugo Ellis, Borrowing Together for Better Balance Sheets, INFINZ Journal, May 2012.

The “infrastructure deficit” in New Zealand was another factor supporting LGFA’s development. It was clearly recognised by both central and local government that infrastructure spending would need to increase significantly over the next decade to maintain New Zealand’s international competitiveness. To balance this cost between current and future generations, it was inevitable that local government borrowing was set to rise considerably. Having a more efficient funding vehicle on hand would minimise the cost of this additional borrowing.

A group of nine councils strongly supported LGFA’s development, and formed a steering group with Local Government New Zealand to turn the concept into reality. Key advisors, Cameron Partners and Asia Pacific Risk Management, were appointed to work on a range of structural issues.

In May 2011, an Establishment Board chaired by Craig Stobo was formed to negotiate with key stakeholders and provide day-to-day guidance to the advisors. Over two years of work by the steering group and Establishment Board (funded by the nine councils and central government), resulted in a proposed structure for LGFA that shared some features with peer local government funding agencies in Scandinavia, but with a uniquely kiwi element.

For example, LGFA’s capital structure includes Borrower Notes (debt securities that can be converted to equity under specific circumstances) and investors in LGFA are supported by a joint and several guarantee from participating local authorities and an initial $500 million liquidity facility from NZDMO. Furthermore, start-up operating expenses were minimised via an outsourced services agreement with NZDMO.

Overall, the robustness of LGFA’s structure is best measured byit's credit ratings. In September 2011, Standard and Poor’s and Fitch both assigned LGFA a preliminary domestic currency credit rating of AA+; the same rating they assign to the New Zealand government.

During the same month, the Local Government Borrowing Act 2011 received royal assent.

From the Jobs Summit in February 2009, almost three years of dedicated work by a large cast of committed stakeholders culminated in the incorporation of LGFA on 1 December 2011.

LGFA Establishment Board

• Craig Stobo, Chairman

• Paul Anderson, Christchurch City Council

• Eugene Bowen, Local Government New Zealand

• Mark Butcher, Auckland Council

• Matthew Walker, Hamilton City Council

Advisors to the Board

• Hugo Ellis, Cameron Partners

• Stuart Henderson, Asia Pacific Risk Management

The LGFA Establishment Board and their advisors won the 2011 KangaNews Achievement Award for their contribution to the development of capital markets in New Zealand

Source: Cameron Partners

End excerpt

If you want to know how little reward you get for how much risk you take to borrow from the Rothschild International Investment Bank designed Local Government Funding Agency, take a look at the details put out by the Taranaki Regional Council when they joined to fund the Rugby Park Rebuild.

Another concern to me from the information in the document is how those who are equity base shareholders that becomes the equity reserves required for what is essentially a bank, is tacked onto the loan by the lenders then given back to become the reserves, just seems dodge city to me:

Taranaki Regional Council
2019/2020 Annual Plan Statement of Proposal Proposal to join the Local Government Funding Agency Scheme Consultation Document
https://www.trc.govt.nz/assets/Documents/Plans-policies/AnnualPlan2019/LGFAConsultationDocument.pdf

Introduction

The Taranaki Regional Council (the Council) is considering participating in the New Zealand Local Government Funding Agency Ltd (LGFA) scheme. The LGFA is designed to allow local authorities to borrow at more favourable interest rates. The LGFA is a council-controlled trading organisation (CCTO) established by a group of local authorities and the Crown. There are 31 shareholders, comprising the New Zealand Government (20%) and thirty councils (80%). The LGFA governance structure comprises the New Zealand Government and thirty councils, the LGFA Shareholders Council and the LGFA Board of Directors.

The LGFA Shareholders Council comprises five-to-ten appointees from the Council Shareholders and the Crown. The LGFA Board is responsible for the strategic direction and control of the LGFA's activities, and is led by an independent chair. All local authorities are able to borrow from the LGFA. Different benefits apply depending on the level of participation. Most local authorities borrowing from LGFA enter into guarantees in favour of LGFA and other local authorities. However, this is not compulsory. A local authority can choose not to provide these guarantees, which means it will not have this contingent liability, but would only be able to borrow a limited amount ($20,000,000), and will be required to pay a higher interest rate.

The Council is proposing it will participate as a Guaranteeing Local Authority, one which guarantees the obligations of the LGFA. Principal Shareholding Local Authorities are required to invest capital in the LGFA, and expect to receive a return on that capital; it is acknowledged that this may be less than might be achieved by alternative investments. This is because the overarching objective is that the benefits of the LGFA scheme are passed to Local Authorities as lower borrowing margins, rather than being passed to shareholders as maximised profits. It is not proposed that Council be a Principal Shareholder at this stage.

You can make a submission online at www.trc.govt.nz, or by email or letter. If you want more information, you can see the complete proposed 2019/2020 Annual Plan on our website, or at our office at 47 Cloten Road, Stratford. You can give us a call on 0800 736 222 and talk to one of our staff.

We look forward to hearing from you.

David Macleod

Chairman (Now National Party MP for New Plymouth)

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As at 30 June 2018 the Council had no borrowings. This is expected to increase to approximately $50 million for the Yarrow Stadium repair/reinstatement project over a 2 year period. Consequently, the benefits of lower interest margins are significant. Based on these forecasts, the Council anticipates interest savings of approximately $4,000 or 0.4% for every $1.0 million of debt by participating as a Guaranteeing Local Authority. At the peak debt level of $50 million this equates to approximately $200,000 per annum. There are one off up-front costs associated with joining the LGFA of approximately $24,000 and annual ongoing costs of approximately $7,000 for documentation and Trustee appointment, plus approximately $50,000 per annum for a credit rating. The Council believes that the benefit of these savings outweighs the costs of borrowing from LGFA. Joining LGFA as a member council does not mean Council has any legal obligation to use LGFA for its borrowings. The Council is free to borrow from whatever borrowing source is the cheapest at the time of borrowing.

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Q. SHOULD THE COUNCIL PARTICIPATE IN THE LGFA SCHEME AS A GUARANTEEING LOCAL AUTHORITY?

If the Council joined the LGFA Scheme as a Guaranteeing Local Authority, it would be able to borrow more than $20million from the LGFA and would be charged a lower interest margin for its borrowing. LGFA currently has 59 member councils and is the largest lender to the local government sector with loans outstanding of approximately $8.5 billion. One of the contributing factors to the success of LGFA in delivering low cost funding to the sector has been its AA+ credit rating. This is the same as the New Zealand Government. Currently, the LGFA estimates it is delivering costs savings to its member councils of $25 million annually. This saving would otherwise need to be funded by higher rates. LGFA would not achieve the AA+ credit rating without the guarantee structure and therefore there would be no savings in borrowing costs to councils.

LGFA GUARANTEE

Currently there are 48 councils (based on the LGFA September update) who have signed the joint and several guarantee. It is important to note that guarantors are guaranteeing LGFA and not individual councils. The guarantee is limited to a council’s rates income as a percentage of the rates income of all the guaranteeing councils. If the Taranaki Regional Council became a guaranteeing council, we estimate that the Taranaki Regional Council’s share of the guarantee would be approximately 0.16%. This means that if a $100 million call was made under the guarantee, Taranaki Regional Council would contribute $160,000. This figure may change over time as the percentage of total rates income changes. When assessing the potential liability, or consequence of a call under the guarantee we need to assess the likelihood of a: 1. council defaulting on its loans; 2. loss on the loans even if a council does default; and 3. call on guarantors. All the above three factors have a very low probability due to the following mitigating factors.

LIKELIHOOD OF COUNCIL DEFAULT

Performance of the New Zealand Local Authority Sector: There has never been a default by a New Zealand Council. In addition, there is strong oversight of the sector by the Office of the Auditor General (OAG) and the Department of Internal Affairs (DIA). If the Government has concerns over the performance of a council, there are a number of intervention steps that can be taken including the appointment of a Crown Observer through to the appointment of Commissioners.

LIKELIHOOD OF A LOSS ON THE LOANS IN EVENT OF DEFAULT LGFA

Has a range of financial covenants. LGFA member councils that borrow from LGFA need to comply with these financial covenants on an annual basis. The covenants restrict the amount of money a council can borrow. In its 2017 report on LGFA, Standard & Poor’s state that “LGFA’s loan quality is exceptional; all loans in its portfolio are neither past due nor impaired since LGFA’s inception in 2011. It has sound underwriting processes, which involve periodic compliance to the covenants that it sets”. Further all lending undertaken by LGFA to councils is done with a security charge over the council’s rates. This means that in the event of a default by a council, LGFA can appoint a statutory manager who can impose a special rate that would be able to recover the amount owed to LGFA. This ensures all lending to councils is the first ranking creditor.

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LIKELIHOOD OF A CALL ON GUARANTORS

As at June 2018, LGFA had capital of $199.4 million. This was made up of $64.3 million of equity and $135.1 million of borrower notes which could be converted into equity. In addition, there is a further $20 million of uncalled capital. This provides almost $220 million of equity that could be used before a call was made under the guarantee. Further while the New Zealand Government does not guarantee LGFA it is a 20% shareholder in LGFA. In addition, the Government provides a $1 billion committed credit facility to LGFA. This would provide LGFA access to funding in the event of a severe disruption in capital markets which in turn would provide continuity of funding to the local authority sector. The Government is a member of the LGFA Shareholder Council.

GOVERNANCE OF LGFA

The Board of LGFA is currently made up of 5 independent directors and 1 non-independent director. A nonindependent director is someone who works in the local authority sector. There is a requirement that the majority of the directors are independent. One of the key objectives of the Director’s is to protect the interests of the guaranteeing councils.

PERFORMANCE OF LOCAL AUTHORITY FINANCING VEHICLES IN OTHER COUNTRIES There are many local authority financing vehicles that have been set up and successfully operated in other countries. These include financing vehicles in Denmark, Sweden, Norway, Finland, Netherlands, France, United Kingdom, Japan and Canada. They all utilise a cross-guarantee structure by member councils similar to the structure of LGFA. There has never been a call under the guarantee in any of these countries. The oldest of the entities is in Denmark which has successfully operated for 120 years.

STANDARD AND POOR'S ASSESSMENT OF RISK TO COUNCIL FROM THE GUARANTEE Standard and Poor's noted in their credit rating report on Auckland Council on 25th September 2018 that: "As part of the arrangements supporting the Local Government Funding Agency (LGFA), Auckland is party to a joint and several guarantee, which we consider a contingent liability. Given the strength of the institutional framework in New Zealand and the requirement that all debt be secured over rates, we believe that the likelihood of a default scenario that would trigger the joint and several guarantee is low. Therefore, the LGFA liability doesn't affect our view of Auckland's contingent liabilities.” Consequently, the Council is proposing that it will participate in the LGFA Scheme, not as a Principal Shareholding Local Authority but as a Guaranteeing Local Authority. Consequently, Council proposes that option (2) is adopted.

Q. SHOULD THE COUNCIL PARTICIPATE IN THE LGFA SCHEME WITHOUT BEING A GUARANTEEING LOCAL AUTHORITY?

If the Council was to join the LGFA Scheme without being a Guaranteeing Local Authority, the cost of participating would be less. However, it would face higher funding costs, reducing some of the benefit of participating. It is likely that Council would only be able to borrow up to $20,000,000, but Council is anticipating borrowing more than $20,000,000. The LGFA charges a higher interest rate to Councils that are not guaranteeing borrowers. This would reduce the potential savings to $60,000 per annum, $3,000 or 0.3% for every million dollars. The limit on borrowing and the higher interest rate would result in a cost to Council, as compared to option 2 of $140,000 per annum. This is offset by the risk of the guarantee, however as stated above the risk of the guarantee is considered to be low, compared to the savings.
End excerpt

Just so you know what is at stake and how most of your councils, listening to their private investment bank trained advisers, have no idea the danger they have put their societies in for a half percent cheaper interest rate, I point you to these two documents from the Audit and Risk Committee of my local Stratford Council who borrowed 20 million plus for an aquatic centre that now only returns 10% of its running cost that is 13% of the councils whole budget for which they now borrow to subsidise rather than increase rates the massive amount that would be needed to cover it, a complete and absolute debt trap:

2024 - Agenda - Audit and Risk (Stratford District Council) - March - Notice of Meeting

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1. Purpose of Report

1.1 To provide assurance to the Audit and Risk Committee that there is appropriate monitoring of the risks associated with council’s relationship with the LGFA.

2. Executive Summary

2.1 Council is currently borrowing $36,700,000 through the LGFA and is a guarantor to the LGFA along with 72 other NZ councils. Therefore, council is exposed to lending risk -

with interest rate exposure and accessibility to funding, as well as liquidity risk if there was a call upon the council guarantee.

2.2 The half-yearly report shows that the LGFA is achieving all performance targets to date except actual operating expenses is exceeding budget due to additional costs associated with higher lending activity. The LGFA was recently awarded the New Zealand Debt Issuer of the Year Award for the second consecutive year. As at 31

December 2023, LGFA had a market value of loans outstanding of $18.8 billion.

2.3 The Statement of Intent 2024-27 (SOI) sets the strategic priorities, performance targets, and financial budgets for the next three years for the LGFA. The SOI assumes that there are no implications to the LGFA from National’s Local Waters Done Well programme, which is yet to be fully revealed.

Background

4.1 Council joined the LGFA in 2018 as a borrowing council, to be able to obtain access to local government specific financing at lower interest rates than what could be accessed elsewhere from other NZ registered banks.

4.2 In 2020, the council acceded its status with LGFA to guarantor meaning that council could access a lower margin on borrowing rates, but would in turn be liable along with the other guarantor councils for the overall debt of the LGFA. However, the main reason council became a guarantor was so that council could borrow more than $20,000,000 at any one time. The accession was carried out in anticipation of the new swimming pool and the associated new borrowing required.

Date: Tuesday 19 March 2024 at 2.06pm

Venue: Council Chambers, 63 Miranda Street, Stratford

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The Director – Corporate Services noted that as a guarantor to the LGFA council receives the 6 monthly report and the Statement of Intent for the next three years and this has been provided as information to the committee.

Questions/Points of Clarification:

• The District Mayor noted the reference to the number of councils now using LGFA and that it was now close to 100%.

• Councillor Hall asked if there was any risk with all councils being in one pool and the set up failed?

The Chairman noted the way this is structured and the current credit rating gives councils confidence.

There are different layers of risk for local authorities and the Stratford District Council was at the lower level as it is only a guarantor. The next level above is shareholders and if there was a need for more capital then the first call would be to them, however before it got to that stage treasury would be called upon. The biggest risk, which has now been reduced, was the transfer of debt for three waters which would have diluted the amount of debt significantly that LGFA has.

• Councillor Jones asked about the return on investment for shareholders and if this council should be investigating it. The Chairman explained that there was a original request for shareholders and those councils were the ones that took the risk at that point, it is a good return on investment but with reward comes risk. Should there be a call on funds then they would need to be able to react to that. He was not aware of further shares being issued to new investors. Councillor Jones noted that Whanganui had just joined.

• It was clarified that the level councils guarantee to is proportionate to the total rates for that council. It was further clarified that the security is the land in the areas so if required a default rate could be set on every property which could be sold if the rate is not paid.

Stratford’s new pool in the deep end of rates funding
https://www.stuff.co.nz/nz-news/350233289/stratfords-new-pool-deep-end-rates-funding

“Stratford residents are rightly proud of their new $22 million swimming pool, but it’s a community asset that doesn’t come cheap.

For every $100 of rates spent, $13.46 goes to the swimming pool complex. And of the 15.5% rates increase, 3.2% is down to the pool.

Stratford District Council (SDC) is working on its long term plan and prioritising the outcomes it wants for the district.

Roads, water, earthquake strengthening buildings and demolishing the TSB complex are major items the council is asking residents to have their say on.

Though the new $22m Wai o Rua Aquatic Centre had 86,933 visitors for the 2023/24 year to the end of February, user charges covered just 10% to 25% of the cost of running the pool with the rest being topped up by council.”

New Zealand Government

https://www.beehive.govt.nz/release/unlocking-local-water-done-well-new-water-service-delivery-modelsnlocking Local Water Done Well: New water service delivery models

8 August 2024


“Councils and voters overwhelmingly rejected Labour’s expensive and divisive Three Waters reforms. This Government has swiftly repealed those policies and restored local control over water assets. The key details announced today will enable new models for financially sustainable water organisations and increased borrowing from the New Zealand Local Government Funding Agency Limited (LGFA) for water services, reducing the burden on ratepayers.

“LGFA has confirmed it can immediately begin lending to water CCOs that are financially supported by their parent council or councils. LGFA will support leverage for water CCOs up to a level equivalent to 500 percent of operating revenues – around twice that of existing councils – subject to water CCOs meeting prudent credit criteria. This will enable councils to better manage debt and make essential infrastructure investments without drastic rate hikes.”

Using debt to spread the costs of long-term assets means that councils can invest for long term growth and pay back their debts across the lifetime of new assets, ensuring the costs of those assets are paid for by those who use them, rather than simply pushing up rates today. 

“The new water service delivery models will also ensure sustainable water services across New Zealand by providing councils with the flexibility and tools they need to meet their unique needs. By working together, councils can achieve greater efficiency and access the borrowing they need to keep water services affordable for their communities

“Our expectation is that councils will now use this certainty and the additional borrowing capacity to reduce pressure on ratepayers while being able to invest in the critical water infrastructure New Zealand needs.” Mr Brown says.

This is all on top of our already insurmountable national government and private debt zombie situation.

Nation of Debt: How much Kiwis owe the world and why it matters By Liam Dann

5 Aug, 2024

The ugly numbers In the year to May 31, we’ve hit a grand total of $827 billion. That figure is up from $790b last year - a rise of nearly 5%. It represents an average of $153,777 in raw debt for every Kiwi.

Nation of Debt: Why government debt is up 130% from pre-Covid By Jenée Tibshraeny

6 Aug, 2024

ANALYSIS

The Government’s debt pile has risen by 11% over the past year, and by 130% from pre-Covid, to $215 billion. While it’s downsizing the public sector to pay for tax cuts, the sluggish economy is seeing it receive less tax revenue than expected. This is pushing out a return to surplus. Until the books are out of the red, the Government has to keep renewing its debt, rather than pay it down. It’s spending more than $8b a year on interest, and $5b a year to unwind the Reserve Bank’s Covid-era money printing endeavour - the Large-Scale Asset Purchase programme. It can’t shake the Covid hangover overnight and needs to balance prudence with investment to future-proof the country. If the Government slashes spending too much, it risks unnecessarily cutting the quality of public services, only to defer necessary investment. But if it doesn’t tighten its belt, the Reserve Bank could be forced to keep interest rates higher for longer. The Government would also be in a weaker position when it inevitably faces the next crisis.

Taking into account this:

To understand how the private bankers have everything to gain rather than lose from loaning you more credit than you can afford you must first understand how they obtain the credit they loan you. It is not from the savings pools of already existing money as most people think. When an expansion of money already in existance is needed to fund a new idea they simply type the new credit they need to create the new money into their computer at the time of making the loan.

If you do not understand this you simply will not know what you need to guard society from against the banks.

Reserve Bank of New Zealand about the creation of the money of our nation:
https://www.rbnz.govt.nz/hub/news/2023/01/money-creation-in-new-zealand

"This Bulletin article describes the monetary base, explains how broad money is created through the bank lending process, and explains the constraints on broad money creation.

The Reserve Bank of New Zealand is responsible for maintaining people’s trust in money. Trust and credibility are central to the idea of money, without which, the economy could not run smoothly and people would be much worse off. The Reserve Bank tries to keep the purchasing power of money steady by keeping consumer price inflation low and stable.

There are several forms of money. Some are created by the Reserve Bank directly, and others are created by commercial banks via interactions with their customers.

Money created by the Reserve Bank directly is known as the monetary base, base money or M0. The monetary base includes:

physical currency (notes and coins)

settlement cash balances.

Settlement cash balances are deposits held by commercial banks in their accounts at the Reserve Bank.

However, the monetary base is small relative to the total money supply. The money most people use in their daily lives is known as broad money or M2. Bank deposits make up about 98% of broad money in the New Zealand economy."

I contend that the banks have been ripping off New Zealand to a degree most Kiwis fail to understand by pumping more of their magic wand computer-typed credit into the non productive residential housing sector than they know the rest of the economy has the productive capacity to ever earn enough to service, sucking the economic lifeblood out of us, and holding us over a barrel for it despite that debt being legally odious:

How housing costs are measured in consumer price indexes at Stats NZ https://www.stats.govt.nz/methods/how-housing-costs-are-measured-in-consumer-price-indexes-at-stats-nz/

“The CPI follows international best practice for an index whose primary purpose is for monetary policy, which is to use the net acquisitions concept, and exclude existing houses from the CPI.”

“Land is excluded as it is considered to be the investment component of new housing, and investments are out of scope of the CPI.”

“Why interest payments are excluded from the CPI

Because the primary purpose for CPI in New Zealand is to inform monetary policy, we use the acquisitions approach that measures the cost of purchasing a new house, excluding land and interest payments. If we included mortgage interest payments, there would be a circularity. The CPI is the measurement of inflation the Reserve Bank of New Zealand (RBNZ) uses. The RBNZ sets the official cash rate to manage inflation. The official cash rate influences interest rates. If interest rates were measured in the CPI, they would be contributing to the measure they are trying to manage.”

“HLPIs use the payments approach, which measures price change when a good or service is paid for, regardless of when it is acquired or used. In effect, this use of the payments approach means that the basket items included and the methodology to measure price change is the same as the CPI, except for owner-occupied housing and interest payments.”

Commonwealth Bank Of Australia Chief Economist Gareth Aird re Housing CPI Flaw https://adviservoice.com.au/wp-content/uploads/2017/04/Issues-20-Apr-2017-1113-1.pdf

"According to the ABS, consumer inflation in Australia has risen by 63% since 1998. Over that same period, national dwelling prices have lifted by ~300% (chart 1). Looking at the more recent past, dwelling prices have lifted by 44% since QI 2013 while headline inflation has only risen by 8% (chart 2). For all intents and purposes, dwelling prices are excluded from the CPI. In a technical sense, “new dwelling purchase by owner-occupiers” is included. But this is simply the cost of new homes excluding land (i.e. it is basically a residential construction cost index). In reality it’s not a representative measure of dwelling prices because it doesn’t take into account the primary driver of changes in the price of a dwelling – which is of course the price of land. Growth in the new homes ex-land component of the CPI bears no resemblance to changes in dwelling prices (chart 3). And yet this component of the CPI is worth a non-trivial 8.7% of the total basket."

Housing Per Capita Intergenerational Disadvantage CPI Flaw https://centreforequitablehousing.org.au/wp-content/uploads/2021/07/Generation-Stressed-FINAL.pdf

Executive Summary

We estimate the total cost of a mortgage as a proportion of wages over the 30-year life of a standard home loan. To do this, we compared home prices, mortgage rates, and wage changes to see what proportion of a median income would go to covering the cost of the median mortgage. The results reveal a significant increase in the lifetime expenditure on the median mortgage over three decades, and a consequent reduction in the spending capacity of average Australian households.

For a Silent Generation family buying in 1970, the average repayment cost over the course of the mortgage was 11.2% of their gross income.

For a Baby Boomer family buying a home in 1985, the average repayment cost over the life of the mortgage came out at 19.5% of gross income.

For a Generation X family though, who bought in 2000 and have approximately nine years left to go on their mortgage, we estimate they will spend 25.5% of their gross income on servicing mortgage debt.

That is a 130% increase in the lifetime cost of owning a home over 30 years. It may seem counterintuitive that a home is significantly more unaffordable for current mortgagees, given that the Boomer Family had to pay double-digit interest rates in eight of the first 11 years of their mortgage, while the Gen X family have ridden the wave of low interest rates since the Global Financial Crisis (GFC).

The fact is, though, judging housing affordability solely on the basis of interest paid is a crude measure. Low interest rates may appear to benefit households, but they contribute to spiralling house prices and reflect a failure of monetary policy to balance the economy over successive decades in order to effectively keep critical asset prices in line with wage growth.

The end.