Research Briefing | May 1, 2024

Lower house prices and falling rates will slow inflation in Canada

Lower house prices and falling mortgage rates will reduce stubbornly high shelter inflation and help return headline CPI inflation to the 2% target.

What you will learn:

  • Mortgage interest cost (MIC) has been one of the largest contributors to higher CPI inflation recently. MIC growth hit a peak of 30.7% y/y in Q3 2023 but will slow to 8.7% y/y by Q4 2024 and slide to 0.6% y/y by Q4 2027 as the Bank of Canada (BoC) begins cutting rates in June and house prices slip lower this year and then rise only modestly.
  • Lower house prices drove a 1.3% y/y decline in homeowners’ replacement costs (HORC) in Q1 2024 and it’s forecast to fall by 5.8% y/y in Q4 2024 and then rise by 0.9% y/y in Q4 2027 as modest house price growth resumes.
  • The BoC is concerned that rate cuts will rekindle housing demand amid limited supply and boost shelter inflation. However, record housing unaffordability and government measures to minimize speculation should help prevent a sustained surge in house prices.
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