Canadian Real Estate Is The Second Biggest Driver of Inflation: BMO

Canadian real estate is finally starting to show up in inflation data, but it may not be as high as you would guess. BMO chief economist Douglas Porter shared his take on Canada’s inflation numbers. The consumer price index (CPI) is starting to make a sharp climb. Most of the increase is attributed to the comparison period, but not all. The second-biggest driver of CPI last month was shelter, and it wasn’t subject to much of a base effect.

Canadian CPI Rises 2.2%, Almost Double The Previous Month’s Rate

Canadian inflation numbers made a sharp increase, with the annual rate doubling. CPI increased 0.5% in March, when compared to the previous month. This brought annual growth to 2.2%, double the month before. The jump may not feel all that big, due to the influence of the “base effect.” 

Base effect is when a previous period had low growth, exaggerating current growth. March 2020 was the beginning of the pandemic, when the initial shock was felt. Lockdowns pushed price growth for goods and services flat. The current amount of growth now looks on target, but central banks are ignoring that. Instead, BoC said it will look for “sustainable” inflation, next year.

Canadian Consumer Price Index (CPI)

Source: BMO Economics, Haver Analytics.

Shelter Costs Are The Second Biggest Driver of Inflation Now

Porter previously said Canada’s hot real estate market would show up delayed in the CPI. Now it’s finally arrived, although he says the impact is still muted. The shelter component of CPI increased by 2.4% in March, compared to a year before. Not quite a reflection of what many people would associate with housing. 

There are a few trends skewing the view on shelter, and one of those is replacement costs. “The replacement cost index (basically, new home prices) was one of the biggest contributors to the rise in inflation, both last month and over the past year (jumping 7.9% y/y),” he observed. 

The huge growth is muted by the heavy weighting of mortgage servicing costs though. Shelter costs also include the cost of maintaining homes already owned. Since mortgage rates plummeted, payments can fall for renewal. Mortgage payments are a substantial weight for the index, and the primary reason it’s so low. That may be temporary, as “mortgage interest costs keep this measure in check—for now.”

Shelter costs were only second to gasoline prices, which surged a whopping 35.3% from the same month last year. This was a huge skew due to the base effect. When the pandemic first kicked off, lockdowns led to excess inventories. This pushed gasoline prices much lower than they normally should have been. Now that demand has returned, and inventories are better planned, prices are firming.

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  • Ottawa Resident 2 years ago

    Does anyone actually believe government inflation numbers anymore? At this point, it’s just a circle jerk. They won’t even acknowledge when it hits its own target now.

    • D 2 years ago

      Yes, the numbers are always faked like the US inflation rate which is suspiciously always just under 2% every year but when you use shadow stats it’s well over 10% annually. Just a though, US median household income was nominally $30k in 1990, adjusted for inflation its $60k today and the current median household income is $68.4k. Not much growth after 30 years and inflation halved the dollar in that time frame.

  • D 2 years ago

    The biggest myth is that Canada survived the 08’ recession without much damage. In reality the booming price of oil saved Canada until it crashed in 2014, housing since 08’ has also saved Canada but it soon will crash too. What goes up must always come down. Canadians better prepare for a depression, the economy has been stagnant since the fundamentals crashed in 08’.

    • Oops 2 years ago

      Canadians kicked the can down the road with debt and credit. They didn’t save themselves at all. They just consumed tomorrow’s income to spend today. That’s it. Nothing innovative about it.

    • Norm 2 years ago

      Don’t stay up tonight waiting for real estate prices to go back to 2008 levels. Prices might level off or drop slightly. In the last 52 years that I have been selling Ontario real estate the general trajectory is up. If you are a tenant dreaming about a crash, keep renting. Mortgage rates and low inflation is driving the market along with low supply. The government won’t interfere. They are loving the ride.

  • BoBnUSA 2 years ago

    Tiff the Stiff has indicated he will et inflation run hot before raising interest rates

    all in an effort to prevent the housing market from collapsing

    Bank of Canada policy

    cash in savings? – no good!

    debt? we got you covered!

  • Kris 2 years ago

    You are 100% correct. Whenever I say the economy has truly been stagnant and that we have a fake economy since 08 people think I’m nuts. All I see is mountains of debt on top of debt building up and inflated asset prices but no real growth. I guess the only real growth these days would have to come from emerging markets. They can synthesize or engineer growth by crashing markets and popping bubbles then growing/”building back better” from there on which lines up with your prediction of a depression. Crazy times were in.

  • straw walker 2 years ago

    Really?? Just real estate

    Commodity prices over last year…
    Lumber: +265%
    WTI Crude: +210%
    Gasoline: +182%
    Brent Crude +163%
    Heating Oil: +107%
    Corn: +84%
    Copper: +83%
    Soybeans: +72%
    Silver: +65%
    Sugar: +59%
    Cotton: +54%
    Platinum: +52%
    Natural Gas: +43%
    Palladium: +32%
    Wheat: +19%
    Coffee: +13%
    Gold: +3%

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