The logic seems implacable. By raising its interest rate, the Bank of Canada contributes greatly to inflation because it also increases mortgage payments. The Bank must therefore stop raising its key rate, or even consider lowering it.
This latest salvo against the Bank of Canada comes from the leader of the New Democratic Party (NDP), Jagmeet Singh. On Wednesday, he told his MPs gathered in Ottawa: “According to the Bank of Canada and Justin Trudeau, raising interest rates is supposed to reduce inflation. This is the goal of the exercise. But now the Bank of Canada is causing the inflation it is supposed to fight.”1.
The criticism, although factually correct, is flawed for two reasons, essentially: it ignores the overall effects of the Bank’s monetary policy, particularly on house prices, and it ignores the limited effect over time of the mortgage inflation.
First, the facts. In July, the cost of mortgage interest increased by 30.6% compared to the same month of 2022, according to Statistics Canada data. Of all the items that contribute to inflation, this is the element that rose the most sharply in July.
Without mortgage interest, inflation would not have been 3.3% in July in Canada, but 2.4%.
First comment: this 30.6% increase in mortgage interest is for the month of July only. Taking the average for the last year, the increase is more like 20.6%. And overall inflation without mortgage interest would have been 4.8%, lower than the 5.3% overall.
Of course, the impact of rate increases on monthly mortgage payments is not over. And this increase really hurts – or will hurt – especially to new owners who bought at the top of the market, in 2021 and 2022, and who took a variable rate.
By the end of 2023, rate increases will have affected 47% of mortgages, according to estimates from the Bank of Canada. And the other half will be distributed over the following three years, affecting in particular households who had prudently chosen a fixed rate.
But by raising interest rates, the Bank also stopped the boom in house prices that was raging, thus helping to drastically curb potential mortgage inflation.
Between June 2020 and June 2022, when interest rates were low, the price of existing properties increased by 44% in Canada (40.4% in Quebec), on average, according to the Canadian Association index. real estate.
However, since June 2022 – four months after the start of the increase in interest rates – the rise in prices has continued to slow down, even moving into negative territory in October 2022. So much so that for the past year, the average price fell by 4.9% in Canada (3.4% in Quebec). On the graph, the impact is striking.
INFOGRAPHICS THE PRESS
The increase in the key rate and mortgage rates will stop, sooner or later. And rates will eventually come back down when inflation is under control. Is it mid-2024, late 2024, early 2025, later? No one can predict it with precision.
One thing is certain: when rates fall, mortgage interest will eventually decrease as well, just as it rose with rising rates. And then the mortgage payments will help reduce inflation. In the long term, moreover, mortgage inflation is closely linked to inflation as a whole.
That’s not all. By raising rates, like other central banks around the world, the Bank of Canada curbs demand for most goods and services and encourages people to invest their money rather than spend it, thereby reducing the pace of inflation. The Canadian economy is larger than just the mortgage market.
By the way, over the past year, mortgage interest has not been the biggest contributor to inflation. It is rather the diet which played this role.
On average, overall inflation has been 5.3% in Canada over the past year, and it would have been 4.8% without the mortgage interest component, but 4.5% without the food component. .
This stronger impact of food – whose prices have nevertheless increased half as much as mortgage interest – can be explained by the fact that everyone is suffering from food inflation, while only a portion of Canadians pay a mortgage.
More precisely, 37% of Canadians are renters (a little more in Quebec), while 35% are owners with a mortgage and 28% without a mortgage, estimates the Bank of Canada.
This difference explains why, in 2022, food represented 16.7% of the household consumption budget, on average, compared to only 3.8% for the cost of mortgage interest, according to Statistics Canada.
That said, real estate inflation does not only affect homeowners, but also renters. The latter were more spared than owners after the pandemic, but the catch-up will be felt in 2023.
Rising interest rates hurt new, often younger, homeowners. And it risks causing payment defaults, especially if the job market becomes gloomy.
Pressure from politicians will therefore continue to be strong on the Bank of Canada, like every rising rate cycle. This transition is unfortunately the hard price to pay to have a more stable economy in the long term.
2023-09-12 14:58:51
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