"There are a few reasons why regional house price growth does not measure regional inflation and thus does not accurately reflect changes in the cost of living. First, house prices capture both the price of housing services (i.e., shelter) and the value of housing as an asset (which is primarily the price of the land). The latter drives most of the change in house prices. As the value of housing increases (decreases), the return on investment for homeowners increases (decreases), driving up (down) the price that consumers will pay for housing. Changes in house prices are useful for studying broad housing market trends, as well as household wealth, but do not necessarily reflect changes in the actual cost of housing services for homeowners. "
From a new article by Charles S. Gascon and Andrew Spewak in Economic Synopses, a publication of the Federal Reserve Bank of St. Louis.
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