Shelter Inflation | Canada Up Close

Hi, I’m Cassidy Rheaume, Associate Economist at Oxford Economics. Today I will be discussing why we expect lower house prices and falling mortgage rates will help slow headline CPI inflation in Canada.rnrnShelter price inflation, which accounts for 28% of the CPI basket, has been one of the largest contributors to overall inflation in recent months. Recently, shelter inflation has been driven by a subcomponent mortgage interest cost inflation, which has skyrocketed since the Bank of Canada’s series of interest rate hikes, which began in early 2022.rnrnMortgage interest cost inflation peaked at 30.7% year over year in Q3 2023, and we expect it will continue to slow to 8.7% year over year by Q4 2024rnrnAs the Bank of Canada starts cutting rates in June and lower house prices gradually reduce principal payments. By Q4 2027 we anticipate mortgage interest cost inflation will slow to 0.6% year over year.rnrnAnother component of shelter prices that we believe will drag inflation down this year is homeowners’ replacement cost. Homeowners’ replacement cost declined by 1.3% year over year in quarter one 2024, reflecting falling house prices.rnrnWe anticipate that house prices will decline another 5% by mid 2024, which should lead to a 5.8% year over year contraction in homeowners’ replacement cost in Q4 2024. As house price growth resumes, we anticipate that homeowners’ replacement cost will rise by 0.9% year over year in quarter for 2027.rnrnOverall, we expect lower house prices and falling mortgage rates will reduce stubbornly high shelter inflation and help lower CPI inflation to 2.3% year over year by Q4 2024.rnrnHowever, the Bank of Canada is worried that rate cuts will rekindle housing demand amid limited supply and boost shelter inflation. We share this concern, but we believe that record housing unaffordability and government measures to minimize speculation should prevent a sustained surge in house prices and keep shelter inflation on a downward trajectory.