Canada produces fake Cpi numbers that simply don't add up. It has been referred to by some people as the CP lie number. Let's explain what I mean.
According to statista.com, Canadian mortgage debt has reached $1,749B in Q3 2022 from $1,309B in Q3 2019 or a 10.1% compounded annual growth rate in nominal terms. Some of these are new loans replacing old loans; for instance, mortgage loans on new homeowners replacing maturing debt. The number of mortgage holders certainly did not grow by 10.1% annually so there is plenty of inflation in the system and they are underreporting on this. Moreover, it's not just the mortgage debt increasing but it's also the average interest expense on the mortgage debt that is increasing too. That is inflationary and nominal wages are not even close to keeping up with it.
Its shelter/rent inflation that primarily drives wages/salaries and overall inflation. To illustrate my point further below.
Canadian Federal workers reached a 12.6% pay increase over 4 years or effectively 3%/ year. Interest expense on mortgage debt when homeowners refinance is going to be much higher than wage/salary increases. This will continue to put upward pressure on wages as homeowners cannot keep up with the cost of living. If real wages are negative for a prolonged length of time, people simply cut back on purchases when homeowners refinance. Monetary policy works with long and variable lags.
Let’s illustrate this with an example.
You purchased your $1m home with a 20% down payment in May 2018. The amortization is 25 years and the term length is 5 year fixed with 3% interest. Your mortgage payment is $3,785.96/month. Let’s fast forward to today.
After 5 years, you have paid $116,198.62 in principal and your mortgage has been reduced to $683,801.38. However, interest on the debt is now 5.59% over 5 years but the amortization is now 20 years. Your monthly payment is $4,713.82/month when you refinance. The shelter inflation for this owner occupied individual is 24.5% over 5 years or a cagr of 4.48% which is coincidentally where Canada’s policy rate sits at. We can easily see that the Federal workers’ pay increase of 12.6% over 4 years will not keep up with the cost of living. Canadians are losing purchasing power and it’s going to get worse when homeowners realize their pay raise is not enough.
That’s my rant.
Happy Mothers Day. Stay positive :)
https://www.statista.com/statistics/1208589/value-of-mortgages-outstanding-canada/#:~:text=In%20the%20third%20quarter%20of,nearly%201.75%20trillion%20Canadian%20dollars.