Originally published as Paul Kershaw's personal finance column in The Globe & Mail.
Amid all the talk of inflation these days, it’s easy to forget that a generation of young Canadians are shut out of home ownership in part because Statistics Canada failed to sound the alarm over rising housing prices decades ago.
Statscan, our country’s venerable data cruncher, shapes our national dialogue about inflation through its Consumer Price Index. The CPI is what the Bank of Canada looks at when it evaluates its success at keeping inflation in check.
Many may be surprised to learn that the CPI doesn’t pay much attention to the way that housing prices matter to younger Canadians and newcomers when they want to buy a home. That’s because CPI doesn’t monitor the size of the down payment that first-time buyers need to save.
Nor does it give enough attention to the total amount people need to borrow.
Instead, CPI monitors what existing owners would need to pay to replace their current home, along with the amount of interest people pay to service their mortgage. Unfortunately, the CPI plays down the amount the bank had to initially loan them to buy the home in the first place.
This shortcoming with Statscan’s measure of housing inflation, along with others identified by the Business Council of B.C., gives rise to a troubling data disconnect.
Since 2000, average home prices have risen by a whopping 318 per cent, based on my calculations of Canadian Real Estate Association data. By contrast, Statscan reported that total inflation over the same period rose by 48 per cent.
As a result, for many of those years, the CPI signalled that annual inflation was generally below the Bank of Canada’s 2-percent threshold for interest-rate hikes, which discouraged the central bank from raising interest rates. That’s until the pandemic and Russia’s war on Ukraine contributed to soaring energy and food prices this past year.
The disconnect between what’s actually happening to average housing prices and the CPI should be concerning for anyone struggling to afford a place to call home. The decades-long underestimation of inflation by Statscan betrayed younger Canadians by being a key factor encouraging the central bank to keep interest rates at historic lows.
Low interest rates decrease the cost of taking on a larger mortgage. Buyers who are able to borrow more bid up home prices.
Rising home prices aren’t adequately captured in inflation data – and there’s your feedback loop, fuelling home-price increases far beyond what hard work can earn, devaluing money for young people, newcomers and renters.
Yes, some first-time buyers want the lowest possible interest charges in order to borrow frighteningly large mortgages so that they can straddle the massive gap between home prices and their own earnings. But their desire for this individual coping strategy amid our dysfunctional housing system reinforces trends that are working against first-time buyers, because they aren’t the only people borrowing.
Current homeowners who have more capital than first-time buyers use low interest rates regularly to outbid their novice rivals.
That’s why Statscan’s Census 2021 data reveal newly built homes are increasingly being bought by investors, and then rented out to younger people; and why one in six Canadian homeowners now owns multiple properties.
It is true there is more to inflation than just housing prices, such as food, energy etc. And shelter expenses do account for 30 per cent of the overall CPI index – more than any other cost of living monitored by Statscan.
The concern is how Statistics Canada measures housing. Its calculation of the cost of home ownership prioritizes the experience of existing homeowners, underestimating the challenges facing those hoping to buy for the first time. This problem contributes directly to the “intergenerational injustice” that Finance Minister Chrystia Freeland identified in Canada’s housing system earlier this year.
Just like the right road signs help keep us safe by making traffic clearer and more predictable, the right economic signals help steer our financial systems toward stability, prosperity and equity. Unfortunately, the housing inflation signals sent by Statscan gave us the green light to speed recklessly through intersection after intersection, putting ourselves and others in danger.
If we’d gotten the signals right years ago, we could have recognized the perils of runaway housing inflation sooner, sparing younger generations the challenge of coping with soul-crushing levels of unaffordability.
There’s no silver bullet to restore housing affordability or reduce housing wealth inequality.
However, there is “silver buckshot” – a comprehensive, multitargeted approach. Increasing housing supply, revamping tax policies and protecting renters are all important. But so is ensuring that accurate information about inflation drives our monetary policy, because that policy is so critical for fuelling or slowing home prices.