The first increase in annual inflation since its June 2022 peak was driven in part by higher mortgage interest costs and higher rent prices, Statistics Canada said Tuesday.
Mortgage interest costs were up 28.5 per cent in April compared with a year ago as a result of the Bank of Canada raising interest rates at a breakneck pace over the past year. That's up from 26.4 per cent in March and 23.9 per cent in February.
“That’s the sharpest increase we’ve seen recently,” said Kiefer Van Mulligen, economist with The Conference Board of Canada
Mortgage payments have spiked as Canadians are forced to renew mortgages at current high interest rates, he said.
“It's a trend that will probably continue as mortgages are renewed at the higher prevailing mortgage rates,” Van Mulligen said. “As a bigger share of mortgages are renewed at higher rates, mortgage interest writ large for Canada will go up.”
Meanwhile, inflation for rent was 6.1 per cent year over year, up from 5.3 per cent in April.
That's despite overall shelter costs rising at a slower pace in April, at 4.9 per cent.
“Rent prices are also climbing and that’s probably related to the same phenomenon,” Van Mulligen said. “Housing affordability is deteriorating because mortgages are more expensive.”
According to Rentals.ca, average advertised rental prices in April were up 20 per cent from pandemic lows in April 2021. Average rents across Canada were up 9.6 per cent compared with April 2022.
The year-over-year increase in the homeowners' replacement cost index also slowed for the 12th consecutive month, which Statistics Canada says reflects a general cooling of the housing market.
A report by RBC Economics says shelter was the largest contributor to headline inflation in April, accounting for a third of the growth.
The Bank of Canada has been aggressively hiking interest rates in order to tame high inflation. Yet, in a paradoxical twist, higher interest rates have pushed up housing costs, contributing to higher inflation this month.
For example, excluding mortgage interest costs, inflation rose by 3.7 per cent in April compared to the same month last year. With mortgage costs included in the consumer price index, inflation was up 4.4 per cent.
The central bank’s interest-rate hikes have come full circle, feeding back into inflation even though other key drivers like commodities have been coming back down, said Colin Cieszynski, chief market strategist at SIA Wealth Management, in a note.
However, RBC said year-over-year mortgage interest costs are expected to start slowing because of the central bank’s pause on interest rate hikes.
But as for rent, high demand for rental housing could keep prices up. A March report by RBC said Canada's shortage of rental housing could quadruple by 2026, and the fierce demand for rental units has been driving record rent increases.
The higher housing costs come despite house prices declining slightly.
The Canadian Real Estate Association said Monday the actual average home price in Canada reached roughly $716,000 in April, down 3.9 per cent from April 2022.
— With files from Brett Bundale
This report by The Canadian Press was first published May 16, 2023.