Thank you.
I’d like to thank the committee for the invitation to speak to you today on this pressing issue of inflation. While there were clear inflationary pressures in late 2021, the situation has gotten much worse with the Russian invasion of Ukraine. Despite this, inflation is an average of individual prices, and those prices can be examined in more detail, with possible solutions for those increases devised.
In looking at the data, we see that there are four main drivers of the high consumer price index. I’d like to examine each in turn and then move to what the federal government might be able to do to address those pressures.
The four main drivers of inflation that have seen large increases in the past year and also represent relatively large proportions of the consumer basket are homeowner replacement costs—the cost to buy a new home or a used home—the purchase of cars and trucks, gasoline and home heating oil, and food, particularly meat purchased in grocery stores.
On the first item of home purchase prices, there has been an incredible increase in house prices since the start of the pandemic due to several factors, not least of which is record low interest rates. Recently, this has led to overwhelming investor demand. Investors now make up a quarter of all new mortgage loans in major markets.
It's worth pointing out that sky-high home prices are not due to a lack of new houses. In fact, we’ve built more new houses in the past four years than we’ve created new families. Also, as there's no “one home per family” rule, with investors buying a quarter of all homes, there never could be sufficient supply, as investors scoop up second, third and fourth properties. The federal government didn’t cause this problem, but it's likely the area where the federal government can have the most impact of the four areas I've mentioned.
Recent federal housing affordability measures have often focused on providing homebuyers with additional options for more leverage. CMHC's shared equity mortgage program or tax breaks for first-time homebuyers simply drive up prices further. At this point, the focus should be on investors, whether foreign or domestic, with the goal of changing expectations about the market. This isn’t a problem of fundamentals. It’s a problem of market psychology.
OSFI and CMHC have plenty of tools available to tamp down investor demand and moderate prices as a result. Requiring ever higher down payments for investment properties would be a good first step. Increasing the down payment from 20% to 30% on first investment properties and then requiring an additional 10% down for every additional investment property would send a strong signal. CMHC should also limit borrowed money as a means of down payments—for example, using home equity lines of credit from existing properties. More transparency in bidding and inspections can certainly help, but will likely have a limited impact on prices.
The second big driver of inflation is the price of gasoline and home heating oil. The war in Ukraine is having an immediate impact in this area. Obviously, the federal government doesn’t control international oil prices, nor did it cause these prices to increase—the Russian invasion of Ukraine did. There are some steps in the short, medium and long terms that could help here.
In the short term, oil price booms will lead to record profits in the oil and gas sector in Canada; however, an extraordinary profits tax on oil and gas producers recycled into a transfer for low-income households could offset the impact of higher gasoline prices in the short term. In the medium term, we should accelerate the shift away from gasoline for personal vehicles. Unfortunately, long wait-lists for electric vehicles and key battery metals like nickel and palladium come from Russia, making this more of a medium-term goal. In the long term, we need to kick carbon out of our economy so its variable prices stop affecting the entire transportation supply chain. We need to do this for climate change, obviously, but also, it makes us far less dependent on despotic regimes the world over.
The third category of big price increases is the price of cars and trucks. This is related to supply chain issues and poor purchasing decisions by automakers early in the pandemic, particularly in the cancellation of microchip orders. This is an international problem and not unique to Canada. In the fall, production was resuming, but border disruptions, along with some key inputs again coming from Russia, threaten to prolong higher prices in this area.
The final category driving inflation is high food prices and, in particular, high meat prices. In part, this is related to the drought last summer in the prairies. However, there is also heavy market concentration, particularly in the beef sector, with only three plants in the country processing 90% of all Canadian beef. In fact, one of those companies that runs those plants specifically cites high beef prices as the reason for its record profits in 2021. Not only are companies passing on the price to consumers, but they’re adding an additional margin to pad their own profits.
Unfortunately, there will likely be a further impact from the war in Ukraine via higher wheat and fertilizer costs; however, this impact will likely take longer to materialize.
In conclusion, several of the key drivers of high prices are international and unrelated to government policy. Ever-increasing home prices are a distinctly domestic issue and the federal government could hold back these increases by cutting investors out of the market.
While oil prices are international, our reliance on gasoline to fuel our transportation is not. That's all the more reason to move to a carbon-neutral future in Canada.
Thank you very much. I look forward to your questions.