Mortgage interest costs surge 28.5% pushing inflation higher in April

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First increase in consumer price index since June 2022

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Released May 16, 2023 • 2 minutes reading time

Young woman calculates housing costs The cost of mortgage interest rose 28.5 percent year-on-year in April. Photo by GETTY IMAGES/ISTOCKPHOTO

Rising mortgage interest costs and higher rents in April helped fuel the first rise in headline consumer inflation since June 2022, the latest data from Statistics Canada shows.

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Consumer price index (CPI) figures released on May 16 showed a 28.5 percent year-on-year rise in mortgage interest costs in April. This is the tenth straight month that the cost of mortgage rates has risen and the fourth straight month that year-on-year increases have topped 20 percent.

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“Someone who took out a three-year mortgage in mid-2020 will now face a huge increase in their monthly payments when rolling over at 2023 mortgage rates, and that’s reflected in this CPI component,” he said Avery Shenfeld, chief economist at CIBC Capital Markets.

“These shelter costs are a factor in the increased inflation rate, but not the only one,” he added, noting that food is “another trouble spot.”

According to Statistics Canada, housing accounts for more than a quarter of the expenses listed in the CPI. Shenfeld put it at almost 30 percent.

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Mortgage interest cost increases are accelerating, according to StatsCan, with April seeing the largest single-month increase in data recorded since January 2020.

This component of the consumer price index tracks both rental and owner-occupied housing, and Statistics Canada believes that the higher interest rate environment may be stimulating higher rental demand and contributing to higher rents, which rose 6.1 percent in April 2023.

Total housing costs rose in the mid-single digits for each of the past two months, up 4.9 percent in April and 5.4 percent in March.

Shenfeld said that while Canada’s economy is “still too hot” to bring inflation back to 2 percent, employment and wage developments appear to be offsetting higher costs, including housing costs.

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“Job and wage growth is enough for Canadians to pay 6 percent more on rent and still have money left over to go out to dinner and meet rising grocery costs,” he said.

Mortgage rate cost hikes are likely to ease as higher-rate extensions work their way through the system, he said, but that may not be enough to ease the pressure on inflation from higher housing costs.

“While the cost of mortgage interest should slow once we refinance more maturing mortgages, we need to slow economic and income growth and build lots of rental properties to cool the component of rental inflation,” he said.

Rob McLister, a mortgage analyst and strategist, said shelter trends were not surprising given April’s “significant” year-on-year rise in mortgage rates.

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Additionally, he said, “For the past two years, rents have been increasing due to the unaffordability of buying and immigration.”

However, he said he would be more interested in new data on resale prices, which suggest they “have bottomed out,” which could appear inflationary.

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“The sell-off in house prices had a deflationary effect on the consumer price index. But now that the resale price index has bottomed, we can no longer count on the housing market to help bring inflation back to target,” he said.

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