The Bank of Canada hiked interest rates again this week in response to persistently high inflation, prompting questions about the role of mortgages in the ongoing battle with high consumer prices.

Canada’s consumer price index (CPI) came in at 3.4 per cent in May, but some observers have pointed out that removing mortgages from the inflation picture would put the figure far closer to the central bank’s two per cent target.

Experts say that mortgages alone can’t be blamed for high inflation, but the situation speaks to the outsized role of real estate in Canada’s economy, and points to a tough battle ahead for the Bank of Canada and other policymakers looking to improve living costs.


Mortgages are particularly sensitive to interest rates, posing a conundrum where the Bank of Canada’s rate-hiking cycle aimed at quashing inflation is actually pushing it higher.

Interest on Canadian mortgage costs rose 29.9 per cent year-over-year in May – an increase nearly 10 times larger than the overall inflation rate.

When asked Wednesday about the relationship between rate-sensitive mortgage costs and inflation, Bank of Canada Governor Tiff Macklem agreed that CPI would be closer to target without mortgages – but he said stripping mortgages out of the inflation picture isn’t as simple as it sounds.

“Yes, if you take mortgage interest out of the CPI, instead of 3.4 (per cent), you’re left with 2.5,” Macklem said. “On the other hand, if you take things out that are falling, what you’re left is what’s going up.”

If mortgages were taken out of the equation, Macklem said other areas where prices are declining would have to be removed as well. For example, removing gasoline price inflation would leave an overall inflation rate of 4.4 per cent.

Beata Caranci, chief economist at TD Bank, said she agrees with Macklem’s explanation.

“It's having an outsized impact, but you can't just say, ‘Oh, what's inflation less the mortgage interest costs,” she told BNN Bloomberg in a television interview on Thursday. “Mortgage interest costs factor in, but that is one of many factors that they're looking at.”


Mortgage expert Victor Tran with RATESDOTCA said he agrees that it’s not a simple question of considering inflation without mortgages.

Real estate plays an outsized role in Canada’s economy, he said, and that makes the housing market an area of key importance for the Bank of Canada compared with central banks in other countries.

“We are heavily dependent on real estate,” he told by phone. “It's an industry that has grown too big to fail and everyone has an interest in it.”

Experts said startlingly high mortgage interest increases may be one of the central bank’s goals as it responds to a surprising housing market rebound from earlier this year.

Tran said it’s no surprise that mortgages are influencing inflation given the historic run-up in interest rates – and Wednesday’s hike was a difficult, but probably necessary move to tamp down on resilient housing demand and hopefully temper prices eventually.

Caranci said the central bank is looking to slow down consumer spending, which it considers a major driver of inflation, as homeowners feel the pinch of higher mortgage payments.

Derek Holt, vice-president of Scotiabank economics, suggested in a note on Wednesday that the Bank of Canada’s economic forecasts in its July monetary policy report were a “fiction” aimed at controlling housing market speculation.


Experts have frequently pointed to inadequate supply as a major cause of Canada’s sky-high housing costs.

On Wednesday, Macklem gestured at high immigration into Canada as driving demand on already limited housing supply and pushing up costs as a result.

Tran said he saw those remarks as a way of pointing the finger at the federal government for its policies aimed at speeding up immigration.

The Bank of Canada’s statement on its rate decision pointed to a pickup in the housing market, and said “new construction and real estate listings are lagging demand, which is adding pressure to prices.”

Economist Jim Stanford with the Centre for Future Work argued that construction trends are also responding to high interest rates as businesses struggle with tougher economic conditions.

“Why is new construction lagging demand? Because record interest rate hikes have knocked the stuffing out of any business case for new housing construction,” he said by phone. “We have this bizarre situation where the Bank of Canada is acknowledging without saying it that their own strategy is making inflation worse, not better.”

Tran said he can also see how rate hikes would have a “domino effect” on housing construction.

“When commercial interest rates are expensive, and that kind of just trickles down to everything else,” he said.


The problem of high housing costs is not something the Bank of Canada can solve on its own, Tran said, arguing it must be a “collaborative effort.”

He sees roles for government regulators like the Office of the Superintendent of Financial Institutions, as well as the Canada Mortgage and Housing Corporation, insurers and governments.

“Ultimately, I think the government has the power to really enforce new rules on the banks and lenders to really slow down the housing market,” Tran said, though he noted that it is difficult terrain for policymakers.

“Everyone has an interest in real estate and there's just too much money to be made, so it's hard for them to really enforce new rules and tightening up lending because it's not in anyone's best interest.”