Fixing the Broken Feedback Loop: Why Canada Needs a Housing Inflation Gauge

The Bank of Canada has cut interest rates for the ninth time since June 2024, exacerbating Canada's housing unaffordability, a problem that has been fueled by Statistics Canada's underestimation of housing inflation. The Consumer Price Index (CPI), which measures inflation and guides the Bank of Canada's rate decisions, has failed to accurately capture rising home prices, instead focusing on existing homeowners' costs. This has led to cheaper credit and faster price growth, leaving younger Canadians struggling to enter the market. Ottawa can fix this flaw by requesting a complementary measure of housing inflation, using existing data, and providing the Bank of Canada with the right tool for its job.

Key Takeaways:

• Statistics Canada's CPI has underreported housing inflation, leading to cheaper credit and faster price growth, which has exacerbated unaffordability for younger Canadians.
• The CPI measures inflation by monitoring what existing homeowners spend on upkeep and mortgage interest, rather than tracking rising home prices.
• The result has been years of cheaper credit, which has helped inflate home values faster than wages, leaving younger Canadians paying the price.
• The Bank of Canada's interest rate cuts since June 2024 have further fueled housing affordability concerns.
• The Canadian government can request Statistics Canada to publish a second CPI series using the "acquisition approach" to track housing inflation, giving the Bank of Canada a clearer view of housing prices.
• Industry Canada should direct Statistics Canada to publish both CPI series, providing the Bank of Canada with a better tool for its job.
• This fix requires no new spending or bureaucracy, only better use of existing data.
• The CPI's design is not accidental, with Statscan explicitly aiming for stability, but this comes at the expense of accuracy for monetary policy.
• The "acquisition approach" tracks housing inflation by measuring the actual cost of acquiring a home, including the land it sits on, providing a more accurate picture of prices.

Statistics:

• Since 2000, average home prices have climbed about 319 per cent, based on Canadian Real Estate Association data.
• The CPI has risen only 69 per cent since 2000.
• For most of this time, inflation appeared comfortably below the Bank of Canada's 2-per-cent target, despite housing values exploding.
• Using the "acquisition approach," Statscan found that housing inflation exceeded the 2-per-cent target many more times than the current CPI approach.
• The study found that this method is "useful for measuring price inflation for the purpose of monitoring central bank monetary policy, because [it] instantly encompass[es] the effect of house price increases."

Sources:

• [Statistics Canada]
• [Bank of Canada]
• [Canadian Real Estate Association]
• [Paul Kershaw, Policy Professor at UBC and founder of Generation Squeeze]
• [Industry Canada]
• [Statscan report on the "acquisition approach"]
• [Bank of Canada's five-year review of its monetary policy framework]