Why soaring home prices fail to budge inflation rate

Inflation remains tame in Canada, registering a 0.1-per-cent increase in October.

The gain was the first in five months, Statistics Canada reported yesterday, snapping the longest streak of declines since 1953.

But one important cost in many Canadian's lives is barely reflected in the stats: home prices. As prices soar for existing houses, inflation stats aren't yet reflecting the full increase. Yesterday's report showed homeowners' accommodation costs are lower than the same period last year - even as recent data on the resale housing market show blistering annual increases.

"It looks like this burst in housing prices isn't showing up at all yet" in the inflation data, said Douglas Porter, deputy chief economist of BMO Nesbitt Burns.

The reason lies in the methodology: New or existing home prices aren't directly included in the consumer price index because they're not outright purchases, said Statscan analyst Daniel Cheung. The CPI tracks changes in what consumers pay for goods - but houses aren't something most people pay for all in cash. People are rather paying a mortgage - and Statscan does track mortgage interest costs.

"The whole CPI methodology is based on how much people pay out of pocket," he said.

House prices changes are a key factor in the Bank of Canada's inflation outlook. Last month, the central bank said the real estate market is one of the key upside risks to its inflation forecast.

Home prices are indirectly included in two ways: Statscan uses its separate report on new house prices to calculate homeowners' replacement costs (such as in the case of a fire), and in mortgage interest costs (a blend of mortgage costs and new home prices). Both components show prices are 3.1-per-cent lower than last year.

By contrast, prices in Canada's resale housing market are up 12 per cent on a weighted average basis from last year, according to Canadian Real Estate Association figures released this week.

Home prices are reflected in the CPI "in a circuitous and a very delayed fashion. What we're seeing in the existing home sales market is barely making an impact, and may never fully show up," Mr. Porter said. Tracking housing costs is a challenge for statistical agencies worldwide, and Statscan "measures it as well as anyone can," he added.

Statscan's shelter component of the CPI comprises 26.4 per cent of the weighting of the index. Within that segment, mortgage interest costs make up 5.7 per cent of the basket and homeowners' replacement costs comprise just 3.3 per cent.

Shelter costs are down 1.6 per cent from last year, the report said. Last month's overall increase came as higher prices for food, furnishing and tuition outweighed declines in cars, computers and natural gas.

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By the numbers

A look at year-over-year percentage change in prices:

Housing

Rent: up 1.5 per cent

Mortgage interest costs: down 3.1

Property taxes: up 4.3

Natural gas: down 30.3

Household

Apples: down 18.1 per cent

Fresh or frozen fish: up 9.9

Child care: up 4.3

Tuition fees: up 4.1

Insurance premiums: up 7.7

Gasoline: down 13.1

Source: Statistics Canada