Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
5:15 p.m.
Liberal
5:15 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you so much, Mr. Chair.
Thank you, Governor Macklem, for being here and for all of your patience.
I'm going to be asking you a question around the comments you made about the fact that core inflation has proven to be quite stubborn. I'm going to then talk about some of the underlying structural issues, and then tie it to something that we're hearing on housing.
One of the things I've been grappling with is that when I talk to Davenport residents, they'll say to me, “Julie, everything's so high.” I'll say to them that we've put in a national child care program and that we are putting in aggressive climate action but are providing the climate incentive. We have the Canada child benefit. We have the old age security increase. We lowered taxes several years ago. We've put in an extraordinary amount of support for our middle class and our working class, and I haven't mentioned the Canada workers benefit, but we've increased that a number of times, and they're all geared to inflation.
You would almost think that they should be okay. We know that food prices have gone up more than inflation. We know that energy prices have gone up and have now come back down again, and then we've been talking about housing.
One of the other things that we're hearing about in our housing study is that there are issues.... At the provincial level in Ontario, if someone moves out of their apartment, the average vacancy rate increase that goes in is around 29%.
I guess my question to you is this: Would that be an example of a structural issue that would cause our core inflation rate to continue to be stubborn? That would be a structural issue at the provincial level that needs to be corrected.
5:15 p.m.
Senior Deputy Governor, Bank of Canada
There are a couple of parts to your question, MP Dzerowicz.
I would start by saying that we talked earlier about the structural shortage of supply in housing. I think that's probably the number one thing that's contributing to keeping shelter costs generally high, and rent in particular.
I think the situation that you describe, though, is.... When—
5:15 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
It's rent control for vacancies. If that's not in effect, would it be a structural issue?
5:15 p.m.
Senior Deputy Governor, Bank of Canada
To the extent that there is more demand for rental properties than there is supply, it's contributing to the increase in prices.
I think that what you're describing there, though, with that significant increase.... Where there is rent control, the opportunity that the landlord has to increase rent comes when an apartment or a rental property turns over. Then you often see a bit of a catch-up or a big jump in the price. However, again, the solution to that is to increase supply.
5:15 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
I would say it's to increase supply, but I'd also say that there are rent controls in a number of other provinces. I think that helps to keep rent increases to around 3%, 4% or even 5%—not 29%, which is the average you're seeing in Ontario in terms of the rate increase on vacancy. It's what we are hearing at the housing committee.
Can you comment, Governor, on the fiscal positions of the provinces and territories relative to the federal government?
5:15 p.m.
Governor, Bank of Canada
No, I'm not going to comment on the fiscal positions of every province.
5:15 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
That's no problem. I just thought you might have a response on that.
My next question is on shelter price inflation.
On page 21 of the “Monetary Policy Report”, you indicate that “shelter price inflation is expected to slow down from its current pace.”
Can you speak to how and why you believe this?
5:15 p.m.
Governor, Bank of Canada
What we indicated in the “Monetary Policy Report” is that given that the issue is largely supply and the problem has been building up for at least a decade, it's not going to....
We're very pleased to see all levels of government working with industry to tackle this problem, but even in the best-case scenario, it's not going to get solved quickly. The government definitely needs to work on solving it, but it's a pressure we're going to have to live with for some time. We said it's one of the things standing in the way of getting inflation down. It's slowing the decline of inflation. However, when we look at everything else, we can see clear evidence that our interest rates are cooling inflation.
As has come out in previous questions, there are lags in the effects of monetary policy. As people renew their mortgages, these higher interest rates feed through the economy. We think there's more in the pipeline. It will ultimately bring inflation down, even if it's taking a little longer than we'd hoped.
5:20 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
You're saying it will ultimately reduce shelter price inflation, as well, just to finish the—
5:20 p.m.
Governor, Bank of Canada
No. I mean, we don't try to control the prices of every different piece. It's bringing overall inflation down—
5:20 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
To be clear, I don't understand your comment around shelter price inflation being expected to slow.
5:20 p.m.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
I have a point of order, Mr. Chair. The member should let the governor answer.
5:20 p.m.
Governor, Bank of Canada
What we said is that shelter price inflation will likely make a larger contribution to overall inflation for some time, until that supply issue gets resolved.
5:20 p.m.
Liberal
5:20 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Governor and Senior Deputy Governor Rogers, with regard to housing, is Canada in the midst of a real estate bubble?
5:20 p.m.
Governor, Bank of Canada
We've seen sharply rising pressure on the housing market in recent years. House prices in Canada have increased 50% on average. Interest rate increases have restored more equilibrium to the housing market, and rising interest rates have quickly put a damper on housing demand.
We have a large country, comprising many housing markets, given our various cities. Every city is in a somewhat different situation, but the market, on the whole, is more balanced today than it was. However, housing affordability remains a problem.
5:20 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
How does the Canadian housing market compare to those of other western countries?
5:20 p.m.
Governor, Bank of Canada
The technical data are provided in box 2 of the Monetary Policy Report. There you'll see that many countries experienced significant shelter market fluctuations during the pandemic. That's not really surprising since everyone in every country stayed home. Interest rates were reduced to exceptionally low levels in all the industrialized countries.
The housing market is very local. It isn't an international market, and prices may vary greatly from country to country. Consequently, the situation varies somewhat in each country.
As regards the impact this situation has on inflation, I should note that the method that organizations responsible for establishing statistics use to quantify inflation in the housing sector varies from country to country. There are at least three separate approaches. That implies that there are differences in the way housing data are incorporated in inflation statistics.
5:25 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
I see. Thank you.
In response to questions a little earlier, you discussed the inflation crisis of the 1970s and 1980s, which resulted in double-digit inflation and interest rates and very high mortgage rates for house buyers.
Consider the Canadian housing market and real estate as a whole, do you think it was easier to buy a house then than it is today, or is it the reverse? How do you explain the difference?
5:25 p.m.
Governor, Bank of Canada
I don't have the affordability statistics for the 1960s and current years with me. However, I can say that, during the 1970s, after 10 years of very high and volatile inflation, the solution was to raise interest rates to more than 20%. That measure triggered a housing affordability crisis. The cost of a mortgage shot straight up.
Raising interest rates sharply and trying to solve the inflation problem before it gets too serious are precisely what we're trying to avoid. I know that high interest rates cause problems for many people. However, interest rates are increased sharply to prevent inflation from taking root in the economy, as was the case in the 1970s.
If that reoccurs, we'll have to raise rates again to address inflation, and that's exactly what we want to avoid.
5:25 p.m.
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
Thank you very much.
After-tax corporate profits as a share of GDP in the year 2000 were less than 10% of GDP. In 2018, they were in the vicinity of 15%, and they're about 20% today, postpandemic. I appreciate and take you at your word that you weren't being glib when you talked about competition as being one of the answers to that for Canadians. When I look at passenger transportation in Canada and at the oil and gas sector, the telecom sector, the grocery sector and the financial sector, I see that none of these Canadian sectors are known for an abundance of competitors, but what they are known for is being high-entrance-cost industries.
Given that Canadians don't actually have a lot of options when it comes to this, what are some other ways we might look to provide relief to Canadians for the very real and substantial part of inflation they're experiencing that is attributable to outsized corporate profits? While I think competition, if it existed, might help, it really doesn't help in some key industries that set prices for things Canadians can't do without.
