Good Morning!
Like everything else these days, the costs of home sweet home have been getting more expensive.
Towards the end of 2022, shelter inflation, which includes rent, mortgage interest costs, homeowners’ replacement costs and other expenses, rose from 6.6 per cent in August to 7.2 per cent in November, says a new report from Capital Economics.
Mortgage interest costs were a big part of that. Assuming the Bank of Canada raises its rate once more to 4.5 per cent at the end of this month, Capital estimates that mortgage costs inflation will rise from 14.5 per cent to more than 26 per cent in April.
But there may be relief on the horizon. Capital expects that after the next few months shelter inflation will fall sharply in Canada as lower home prices feed into the equation.
Homeowner replacement costs, which are a measure of depreciation linked to new home prices, excluding the cost of land, should soon turn negative, along with other expenses, said Capital.
New home prices are expected to fall this year as construction costs drop and real estate commissions are also dropping.
The wildcard in this is rents. Rent inflation continued to climb in Canada in November, with the average listed rent rising 12.4 per cent from a year ago to a record high of $2,024, according to data from Rentals.ca.
And, unlike in the United States, rents are showing no signs of slowing down, rising 2.5 per cent from October and 4.9 per cent over the past three months.
Capital expects this climb will ease in coming months as the labour market weakens and a record number of new apartments are built in Toronto, but Ottawa’s ambitious immigration targets could throw a wrench in that forecast.
Given that, Capital expects Consumer Price Index rent inflation will remain between 6 and 7 per cent for the rest of the year.
Nonetheless, the economists expect shelter inflation to edge lower this quarter and fall toward 3.5 per cent by June. If the Bank does not raise rates beyond 4.5 per cent, base effects will mean mortgage cost inflation will plunge in the second half of the year.
By the end of the year, Capital sees shelter inflation at 1.5 per cent. While that is not enough to pull overall inflation down from the current 6.8 per cent to the Bank’s target of 2 per cent, Capital also sees energy, food and goods inflation decelerating in the moderate recession to come.
“For these reasons, we continue to judge that the Bank is underestimating how quickly overall inflation will decline. We expect headline inflation to average close to 1.5 per cent in the final quarter of 2023, compared to the Bank’s forecast of 2.8 per cent. Lower inflation should encourage the Bank to cut its policy rate to 2.5 per cent in early 2024,” writes Capital economist Stephen Brown.
And that would be a relief.
