Inflation, part 2: Shelter in Canada and the United States

Shelter inflation is mostly predictable because it already happened, but it happened in asset prices rather than the CPI. As long as interest rates kept falling, we could maintain an illusion that rising housing prices don’t imply rising shelter consumption. The pressure was building up, but it was hidden; now rising interest rates are uncorking the shelter bottle.

Talks about the differences between how the housing markets work in Canada versus the US. One difference is in how inflation is measured:

Unlike StatsCan, the BLS does not directly include mortgage interest costs in the CPI, so rising interest rates are only relevant to shelter inflation to the extent that they influence the rental market. This should reduce the degree to which rising interest rates transfer into shelter inflation in the US.

But also, mortgages are different:

The US has 30-year fixed-rate mortgages, and they are widespread, especially after the financial crisis of 2008. In Canada, such products are not even available to homebuyers. Canadian “fixed-rate” mortgages would be called adjustable-rate mortgages in the US, as they are typically 3-year or 5-year contracts. So while Canadian fixed-rate mortages bought at low pandemic rates and high pandemic prices may be facing rising interest costs starting in 2025, many Americans who bought a home in 2020 can enjoy low rates until their last payment in 2050.

It seems that the Canadian housing market has further to fall:

In the US, home prices underwent a significant correction following the financial crisis of 2008, returning to their inflation-adjusted norm before regaining steam in 2012. Adjusted for inflation, US housing prices have now overtaken their pre-financial-crisis high.

Canada saw no such correction, and even though interest rates have been slightly higher and true fixed mortgages are not available, home prices have continued climbing at about the same uninterrupted pace for 20 years.