Rising Mortgage Interest Costs and Rent Prices Drive First Increase in Annual Inflation


Since its apex in June 2022, Statistics Canada recently reported the first annual increase in inflation. The increase in inflation can be partially attributed to rising mortgage interest rates and rent costs. The past year has witnessed a rapid increase in mortgage interest rates, resulting in increased mortgage payments for Canadians. The demand for rental housing is concurrently driving record rent increases, even though the housing market is showing signs of slowing. This article investigates the factors that contribute to inflationary pressures and their effects on Canadian households.

The abrupt increase in mortgage interest rates contributed significantly to the rise in inflation. In April, mortgage interest rates increased by 28.5% compared to the same month of the prior year. Rapid interest rate increases by the Bank of Canada over the past year are primarily responsible for this escalation. As a result of Canadians being compelled to renew their mortgages at higher rates, mortgage payments have increased. This trend is anticipated to persist, further affecting the affordability of housing. Economists, such as Kiefer Van Mulligen of The Conference Board of Canada, are concerned about the increasing proportion of mortgages being renewed at higher interest rates, which is leading to a nationwide increase in mortgage interest costs.

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Rent costs have also increased significantly, contributing to inflationary pressures. Despite overall housing costs increasing at a reduced rate in April, rents increased by 6.1% year over year, up from 5.9% in March. The rental market has been impacted by the same phenomenon that is driving up mortgage interest rates, which is an increase in prevalent interest rates. As the cost of mortgages rises, the affordability of housing declines, compelling more individuals to turn to the rental market. According to Rentals.ca, average advertised rental prices in April increased by 20% compared to pandemic lows in April 2021, and rents across Canada increased by 9.6% compared to April 2022.

The rise in mortgage interest rates and rental costs has had a significant impact on the Canadian housing market and inflation as a whole. While the homeowners’ replacement cost index reflected a declining housing market in April, shelter costs remained a significant contributor to overall inflation. Compared to the same period last year, inflation rose by 3.7%, excluding mortgage interest costs. When mortgage costs are included, however, inflation rises to 4.4%. This paradoxical situation is a result of the Bank of Canada’s interest rate increases, which have unintentionally contributed to higher housing costs and exacerbated inflationary pressures.

As a result of the Bank of Canada’s halt in interest rate rises, the prognosis for mortgage interest costs suggests a possible slowing of the year-over-year increase. However, demand for rental housing is anticipated to keep rents high. According to a report by RBC Economics, Canada’s rental housing shortage is expected to quadruple by 2026, putting persistent pressure on rental prices. The Canadian Real Estate Association reports that actual average home prices reached approximately $716,000 in April 2023, down 3.9% from the previous year despite minor price declines.

The recent increase in Canada’s annual inflation rate can be attributed to increasing mortgage interest rates and rental costs. By driving up housing costs, the Bank of Canada’s aggressive interest rate increases, which were intended to combat high inflation, contributed to inflationary pressures. Although mortgage interest rates may decline in the future, rental prices are anticipated to remain high due to the ongoing housing shortage. Canadians continue to confront housing affordability difficulties.

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