Inflation and housing

Inflation is coming down, and the reason may lie in what’s happening in housing. 

Driving the news: The central bank’s campaign to hike its overnight rate from 0.25% to 4.5% has sent home prices plummeting. Its recent decision to take a pause is not only good news for homeowners but cause for optimism about the country’s overall high inflation. 

  • Average sale prices in parts of Southern Ontario have dropped over 30% from 2022 peaks, and the central bank expects prices to keep falling until June.
  • The outsized role of housing in the Canadian economy, together with sensitive inflation measures, means what happens in housing ties closely to inflation data.

Why it matters: With housing costs making up 30% of the country’s Consumer Price Index (CPI), the recent rise in mortgage costs (thanks to those pesky interest rate hikes) has actually increased inflation in the CPI. The pause will bring that trend to an abrupt halt.

  • The mortgage interest sub-index of CPI was up 18% year-over-year in December, in part because a large proportion of homeowners hold variable-rate mortgages. 

Zoom out: One economist told Bloomberg that the central bank underestimates how fast inflation will fall as mortgage costs trend down toward the end of the year. In the US, where interest rate changes aren’t so tightly tied to housing, the same rate of easing is unlikely.