Role of Mortgages in High Inflation in Canada

Published July 31, 2023 by Real Estate Leads

Not every realtor or real estate enthusiast will also be an economist, but there are going to be a few folks who can claim being both. It’s these individuals who will be more likely to know that the Bank of Canada has been aiming to keep inflation to at or around 2%, and they’ll also be the ones who might have strongest inklings as to why that may be unlikely to happen. One thing that even the less economically-savvy people will know is that a comparatively inordinate amount of Canada’s GDP is made up by real estate.

While we’re all either realtors or someone else who has some interest in the industry and profession, we can also fairly say that having so much of a country’s GDP in real estate may be less than ideal, and there are indeed some very knowledgeable economists who’d say it is even a little perverse. But it certainly is what it is, and in the same way and for the same reasons it is not hard to see the role that more cumbersome and expensive mortgages are contributing to the growth of inflation in Canada.

What will happen alongside this every time is that greater numbers of individuals, couples, or families that would be active in the real estate markets stay on the sidelines instead, and that equates to a dearth of new clientele looking to work with a realtor. Again, not much to be done in the big picture but what you can do is take advantage of our online real estate lead generation service here at Real Estate Leads. It will provide the leads on new clientele that you’re looking for, and making it easy for you.

Segueing back to topic, let’s look at the role of mortgages in Canada’s growing inflation problem.

Homebuyer Debt Fuel

We’re all going to be very much aware that The BoC hiked interest rates again a pair of weeks back in response to persistently high inflation, but what’s not so immediately apparent in the relevance of that is the way it is prompting questions about the role of mortgages in the ongoing battle with consumer prices for goods and services that are painfully high and climbing higher. The National CPI is Canada’s consumer price index (CPI), and it was 3.4% in May.

However some insiders have suggested that if mortgages are taken out of the inflation picture then the figure would quite a bit closer to the central bank’s 2% target. Those same individuals will also be saying that you can’t focus all or even the majority of blame for high inflation on mortgages, but at the same time the outsized role of real estate in Canada’s economy makes it fairly impossible for it not to pull on the needle with quite a bit of force.

One constant is that mortgages are especially sensitive to interest rates, and in this way this has the Bank of Canada’s rate-hiking cycle running at cross purposes when attempting to suppress inflation instead of pushing it higher. Interest on Canadian mortgage costs rose 29.9 per cent year-over-year in May – an increase nearly 10 times larger than the overall inflation rate.

More Off Target

Even the BoC governor has agreed that their CPI would be closer to target without mortgages, but he also said these days it may even be a case where too much of the focus is put on mortgages. There’s a lot of number crunching and perspective that goes into that, but it is a fair point to say that if mortgages were taken out of the equation then areas where prices are declining would also have to be taken out of the equation. Let’s take the equally punishing price of fuel. If we take out the ongoing inflation as it relates to gasoline prices it would leave a 4.4% overall inflation rate.

What this does suggest is that in many tangible ways real estate has grown into an industry that’s too big to fail. With that understood , it may be that high mortgage interest increases may be one of the central bank’s goals as it responds to a housing market rebound from earlier this year that came as something of a surprise given the climate.

The rate hike of Wednesday 2 weeks ago was a difficult, but probably necessary move to address inflation, but the need to push back against resilient housing demand and temper prices was absolutely a factor in it too. The ongoing reality is that inadequate supply is the primary cause of Canada’s sky-high housing costs. Occurring alongside of this are construction trends where high interest rates means the businesses that would be involved with home building struggle with tougher economic conditions themselves.


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