Let me start by thanking members of the committee for the opportunity to share my views with you. Though I am now the chief economist at Scotiabank, I spent the entirety of my career before that working in the policy world. I have deep respect for the role of public policy and the institutions of democracy in our country. With that, I hope that my perspective can be of some use to you as you consider the inflation and housing situation.
There is no doubt in my mind that inflation and housing affordability are key challenges to navigate for policy-makers. The diagnosis on housing-related challenges is a bit more straightforward to assess, given that much of the issue is made in Canada.
There's no doubt that the pandemic and the associated policy responses have contributed to the strength of the housing market. Low interest rates, generous income support programs, and the desire for households to move away from some cities or to look for larger homes in light of the pandemic have all clearly contributed to some of the strength we've seen.
That being said, the overwhelming cause of the deterioration in affordability lies in a structural imbalance between the number of residents versus the number of dwellings to house them. The very rapid pace of population growth observed since 2015 has not been matched by a commensurate increase in the supply of homes, resulting in a decline in the number of homes per capita since 2016.
Canada, as has been noted by another speaker, has the lowest number of homes per capita of any G7 country. That is an admittedly simplistic way of looking at things, but it would take nearly two million additional dwellings in Canada for us to have the same number of homes per capita as our G7 peers.
The solutions to this challenge are clearly multi-faceted and cut across all levels of government. The federal government sets immigration targets and macroprudential policy governing housing finance, but provinces and municipalities ultimately control the pace at which supply is built. In our view, we will not reverse course on affordability unless housing supply becomes much more responsive to demographic pressures.
We take much comfort from the fact that there seems to be a broad understanding of this reality in the public sector, and we're hopeful that policies will be put in place to increase the elasticity of supply. However, the hard reality is that even within the best of scenarios, it is likely to take years before there is a better alignment between the population's needs and what is available to them.
This means that upward pressure is likely to remain in the housing market, which will add to inflation pressure in Canada. There is no question that inflation is well outside the Bank of Canada's inflation control range. The question with inflation, rather, is what is likely to happen with it from here.
Our understanding of inflation has changed over the year. For a time last year, the rise in inflation was largely viewed as temporary as we thought, along with other central bankers around the world, that a major driver of the inflation surge was supply bottlenecks. Simply put, demand for goods had surged, and that was straining the global economy's ability to meet that supply because COVID impacted key producers, or because of transportation bottlenecks and a range of other factors.
Based on the accumulation of evidence since these assessments were made, it appears to be pretty clear that global production and transportation systems have responded aggressively to the strength of demand and that demand is a more powerful driver of inflation than we thought earlier. In our view, that means the inflation pressures are likely to be more persistent. This is a global phenomenon. Canadian policies likely had little influence on that broad outcome. That, of course, is of little comfort to firms and households that are managing the impact of inflation on their lives.
There is, nevertheless, a Canadian angle to inflation. The record number of job vacancies will put sustained upward pressure on wages in the year to come. This will keep inflation pressures up. The cost of new construction will continue to rise, owing to these capacity pressures in the construction sector but also because the cost of raw materials has increased dramatically owing to the global factors noted above.
Perhaps most importantly, it is very clear that Canadian firms and households believe higher inflation will last and remain uncomfortably high, given the Bank of Canada's inflation control mandate. The December survey by the Canadian Federation of Independent Business, for example, finds that small and medium-sized enterprises now believe they need to raise prices by 4.6% over the next 12 months. Recent readings of this survey are the highest, by far, in relation to history.
Inflation control is a pressing challenge that should see the Bank of Canada tighten rates substantially this year. The simple reality is that its real policy rate became more stimulative as 2021 progressed, even if its actual policy rate has remained unchanged. This is because inflation and inflation expectations rose as policy rates remained stable. Those settings need to change.
Thank you for allowing me these brief opening remarks. I look forward to the discussion and to your questions.