Expert calls on StatCan to overhaul inflation formula to better reflect housing costs

Housing is one of the most significant costs for anyone, regardless of income level — but one expert says official inflation figures don’t properly factor those expenses in.

According to University of British Columbia policy professor Paul Kershaw, the formula Statistics Canada uses to determine the rate of inflation, or the Consumer Price Index, has significant gaps.

He says StatCan, when tracking inflation, doesn’t measure the size of the down payment someone needs to save for an average-priced home. He adds the agency doesn’t measure the total amount of money that someone needs to borrow from the bank to cover the rest of the cost of that house after a down payment.

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Kershaw illustrates what this has meant for inflation calculations in recent years — even during the period of low interest rates before the Bank of Canada started a series of aggressive hikes last year.

“From the standpoint of home ownership, what StatsCan measures is, how much interest does someone pay on the amount that they’ve borrowed? That means they’re imagining I’m already a homeowner — which I am — and so as interest rates go down, and I renew my mortgage, I’m like, ‘oh, I pay less interest on my mortgage, that’s a savings to me,'” Kershaw said while outlining a hypothetical situation.

“And StatsCan reports, ‘housing is getting more affordable, no inflation here.’ But what’s happening, is that as interest rates go down, I and others borrow more money to bid up the price of housing, and they’re not tracking that as a result, the amount one needs to save for a down payment, or the total amount one needs to borrow is rising.”

Given the Consumer Price Index influences how the Bank of Canada moves its benchmark interest rate, how that formula is calculated has major implications. And Kershaw believes if the formula more accurately accounted for housing costs, the central bank wouldn’t have had to move as aggressively to fight inflation.

“The Statistics Canada agency is actually quite weak at measuring housing inflation,” Kershaw said.

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“If it had been strong at measuring housing inflation, it would have alerted us in Canada and especially in B.C. and Ontario that we had housing inflation problems years and years and years ago. So rather than having had this surge of eight interest rate hikes [within a year] … imagine if we’d spread some of those out, starting say 2005, 2010, 2015, 2020, and we’d made that easier for Canadians to manage.

“And it also would have imposed a downward pressure on our home prices much earlier, so we wouldn’t have these staggeringly high home prices now which then people get used to and say, ‘I don’t want them to go down because I’m counting on that equity.'”

In terms of a potential solution, Kershaw wants Finance Canada to direct Statistics Canada to review how it measures housing inflation.