Dominic Darmanin

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Interest Rates and Housing ~ You're Not Going To Believe This!

Interest Rates and Housing ~ You're Not Going To Believe This!

The Bank of Canada (BoC) claims that strong economic indictors necessitate increasing its benchmark interest rate for the first time in seven years. This is to ward of the spectre of inflation which the BoC considers to be one of its top priorities. For the BoC determining what “inflation” is rests on the Consumer Price Index or CPI. But what goes into the CPI isn't necessarily reflective of the actual expenses of Canadians. You'll be amazed what's excluded!

 

The CPI basket excludes mortgage principal, opting instead for a much lower expenditure weight to reflect long-term housing depreciation. (Prior to 2009, it excluded both interest and principal for secondary residences, too.) Also, the CPI basket either partly or entirely excludes current costs of land, renovations, condo and lot fees, indirect taxes and transaction fees for primary residences, and most current costs for secondary residences. The “core” CPI, or CPIX, excludes even more: The costs of fruits and vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest, as well as all indirect taxes.

 

But here's the kicker: Rents are included in the CPI, because they are expenditures that are "consumed" in current period of time. But house prices are not, because they are expenditures on an asset to be consumed over many years. In a sense, houses are treated like capital goods--for consumers.

 

One thing is clear: A great deal of what’s in the average Canadian household’s annual shopping cart is not in the CPI basket.

 

So many Canadians are interest rate sensitive given the high cost of housing in our major cities that further interest rate hikes could have some serious implications concerning housing affordability and Canadians' capacity to afford their mortgage at even moderately higher rates.

 

I only hope that the BoC is putting Canadians' interests ahead of any mythical notion of inflation which is often manipulated for political convenience. Furthermore, concern over inflation is frequently used as the justification to implement fiscal policies which reflect the in the interests of powerful institutions in this country and not necessarily Canadians best interests.

 

 

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