Despite Wednesday’s “worryingly” low inflation result, house prices have continued their upward march right where it hurts the most: the overheated capital cities.

Not only does the consumer price index measure things like groceries and petrol, it also measures changes in the price of buying a new home.

Australia’s official measure of inflation, called the ‘consumer price index’, includes prices changes in the cost of buying new homes. Photo: Getty

In fact, this measure contributes almost a tenth (9 per cent) to the Australian Bureau of Statistics’ theoretical basket of goods and services bought by the average consumer in the eight capitals, making it the single-biggest contributor.

The ABS reported on Wednesday that the overall rate of inflation was 1.5 per cent for 2016, and that the price of buying a new home rose 0.5 per cent in the December quarter.

As seen in the chart below, this continues the national trend of housing price growth, especially in Melbourne. Over 2016, new house prices increased a total of 1.9 per cent, according to the ABS’ inflation measure.

This is despite the recent GDP contraction, disappointing jobless figures, sluggish wage growth, constant predictions of a property market crash, and the fact that Perth is dragging down the average.

And this may not tell the full story.

Martin North, principal at Digital Finance Analytics, said the ABS measure “understates” the true impact of rising housing costs on household budgets.

“The costs of what it really is to live in a place anywhere close to the centre of the major cities, particularly Sydney and Melbourne, is much, much higher than will be stated or imputed in the CPI,” Mr North told The New Daily.

“There is no doubt that everyone is now recognising that house prices relative to incomes – or relative to any other metric you can think of – are way off, they are way too high.”

Another concern: the Reserve Bank’s reaction

Industry Super Australia is predicting the Reserve Bank will be forced to cut the cash rate target by 50 basis points in 2017: 25 points in the first half of the year followed by a further 25 points near the end.

However, this may not benefit the average new borrower or household on a variable rate mortgage, as the big banks are currently lifting borrowing rates despite the fact Australia’s central bank has been in a holding pattern.

“While this 50 basis points might seem very attractive, what it’s more than likely to do is just offset what’s going on in wholesale markets,” Industry Super Australia chief economist Dr Stephen Anthony told The New Daily.

“Therefore, what gets passed on to the consumer may be very little.”

Despite this, Dr Anthony still saw the inflation result as carrying an important warning for mortgage borrowers.

The tepid inflation result may be an excuse for the RBA to cut the official cash rate in 2017. Photo: Getty

“Whilst it may be a ‘no change’ result for households, the most significant risk to the Australian economy in 2017 is vulnerability at the postcode level,” he said.

“If I am wrong and the Reserve Bank starts raising rates, that combined with developments in wholesale markets probably means that the level of mortgage stress will rise exponentially and that would be a significant risk to dwelling investment and obviously house prices would fall accordingly.”

Finance analyst Mr North said he saw a rate rise in 2017 as both prudent and far more likely than any cuts.

“I personally think rates should be higher than they currently are. We are stoking the housing market way beyond what is sensible,” he said.

“The problem we’ve got is that rates will at some point continue to rise. Most people have already experienced a rise of 15 to 65 basis points over the last little while because of bank repricing. That’s having a significant impact on a number of households – 20 per cent plus are finding it difficult to accommodate any rise.

“So if we take the rates even lower we are seeding a longer-term problem. The simplistic idea of ‘cutting rates and hoping’ is not going to work.”

From the March quarter 2017, the ABS will adjust the way it measures prices changes in new dwellings to ‘more robustly’ reflect the rising popularity of apartments.