Housing costs, and Canada’s unique way of capturing them in inflation, suggest price gains may slow rapidly in coming months. Read on.
That means Canadian inflation measures are influenced by both the rise in mortgage costs as the Bank of Canada aggressively raises rates and by the resulting slowdown in theWhile inflation was still 6.3 per cent in December, price pressures in Canada are expected to lose momentum thanks to base effects and continued cooling in the Canadian real estate market, which features shorter-duration mortgages than the U.S. and a higher share of variable-rate home loans.
Those differences are one reason economists say the Bank of Canada — which said it intends to pause its tightening campaign — won’t have to raise borrowing costs as high as the U.S. Federal Reserve. “One way Canada actually stands out from a lot of other countries is that when the Bank of Canada raises interest rates, there’s a temporary boost to inflation because of this mortgage interest rate effect,” Stephen Brown, an economist at Capital Economics, said by phone.The U.S. calculates housing inflation using owners’ equivalent rent, or the price a property owner would have to pay to rent to live there.
Shelter has been a major driver of Canadian inflation in recent months, and was up seven per cent in December. The mortgage interest and rent sub-indexes saw year-over-year jumps of 18 per cent and 5.8 per cent, respectively. But with rates now on hold, Brown expects mortgage interest costs to peak before dropping sharply in the second half of this year. Other inflation inputs, such as commissions on home sales, are already easing.
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