Fixing the Broken Feedback Loop: A Solution for Canada's Housing Affordability Crisis

Strategic Insights -

Rising housing prices in Canada have outpaced wages, leaving many young Canadians unable to afford homes. Statistics Canada's Consumer Price Index (CPI) has been criticized for underestimating housing inflation, which has contributed to this issue. The CPI's design prioritizes stability over accuracy, leading to a flawed feedback loop between data and policy. This has resulted in years of cheaper credit and faster house price growth, leaving younger Canadians to bear the brunt of unaffordability.

Key Takeaways:

  • Since 2000, average home prices have climbed about 319 per cent, while the CPI has risen only 69 per cent.
  • The CPI's design prioritizes stability over accuracy, resulting in a flawed feedback loop between data and policy.
  • The Bank of Canada's 2-per-cent inflation target has been exceeded many times over the past two decades using the proposed acquisition approach.
  • The acquisition approach tracks housing inflation by measuring the actual cost of acquiring a home, including the land it sits on.
  • Using the acquisition approach would have prompted earlier, modest rate increases, tempering the surge in housing prices and unaffordability.
  • The fix is straightforward and essentially free: publish two CPI series, one for indexing benefits and tax rates and another using the acquisition approach for monetary policy guidance.
  • Repairing the feedback loop between data and policy would stop the CPI from fueling inflation and provide a clearer view of housing inflation for the Bank of Canada.

Statistics:

  • Average home prices have climbed about 319 per cent since 2000.
  • The CPI has risen only 69 per cent since 2000.
  • The acquisition approach would have shown inflation exceeding the Bank of Canada's 2-per-cent target many more times than the current CPI approach.
  • The Bank of Canada's rate cuts since mid-2024 account for 10 percentage points of interest rate reduction, with another 11 points expected in the coming year.
  • The proposed fix would provide a clear view of housing inflation, preventing the CPI from fueling inflation it's meant to control.

Sources:

  • Dr. Paul Kershaw, policy professor at UBC and founder of Gen Squeeze.
  • Canadian Real Estate Association data.
  • Statistics Canada CPI reports.
  • Bank of Canada's five-year review of its monetary policy framework.
  • Industry Canada, Statistics Canada, and the Bank of Canada website