Yahoo Finance Bank of Canada shouldn't worry about shelter inflation, says BMO
The Bank of Canada (BoC) should brush aside its concerns about shelter inflation when deliberating future interest rate decisions, Bank of Montreal economist Robert Kavcic says in a note published Thursday.
The dynamics of rent and mortgage costs as they relate to the Consumer Price Index (CPI) mean the BoC should not “get hung up on shelter inflation,” Kavcic told Yahoo Finance Canada in an email, because these would lead policymakers to “cut rates too little/too late.”
Governor Tiff Macklem singled out the shelter component in his remarks during Wednesday’s announcement of a third consecutive 25 basis point cut to the Bank’s overnight rate. “Shelter price inflation is still too high” and “remains the biggest contributor to overall inflation, despite some early signs of easing,” Macklem said.
Shelter makes up about a quarter of most Canadians' spending, Macklem says. "It's going to be very hard to get to two per cent inflation when a quarter of your basket, a necessity, is running that high."
Statistics Canada’s CPI data show the stubborn behaviour of the shelter component even as overall CPI has come back down to territory considered more normal. In his note, Kavcic points out that CPI excluding shelter has actually grown at less than two per cent year-over-year for the past seven months.
Changes to rent and mortgage costs are reflected in CPI data “very slowly,” Kavcic says, noting that the CPI figures “don’t pick up turning points in a timely fashion.” Numerous economists, including at the BoC, have noted that around half of current mortgage holders face major payment increases this year and next as they renew at rates much higher than those available during the pandemic — which will be reflected in CPI data.
Mortgage price shock aside, many indicators show an improving landscape for shelter, Kavcic says. Mortgage costs for new buyers are coming down as interest rates fall, he notes, and “market rent has stabilized even before population growth cooled and with more completions in the pipeline.” A report in early August showed rents in Canada rising at their slowest pace in more than two years.
Macklem made a similar point on Wednesday, observing that “with mortgage rates coming down, hopefully with more supply coming into the rental market, with some reduction in population growth, you should see rent prices come down.”
Kavcic also points out that the housing resale market “hasn’t responded to rate cuts in any concerning way. It hasn’t really responded at all, yet.”
In a note on Thursday, National Bank economist Daren King wrote that "Toronto market conditions, measured by the active listings-to-sales ratio, softened in August, reaching their loosest levels since the 2008 recession (excluding the COVID-19 period). This indicates a deeply 'buyer-favourable' market." In Vancouver, August home sales dropped 17.1 per cent from a year earlier, according to Greater Vancouver Realtors data.
“It’s going to take more time,” said Victor Tran, a mortgage and real estate expert at RATES.CA. “Even a drop of a full percentage point from current mortgage rates would not result in a significant increase in buying power given persistently high home prices.”
Following Wednesday’s rate cut, John Lusink, president of Right at Home Realty, says he doesn’t expect “meaningful change” in the housing market until there have been at least two more reductions.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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