No rescue expected on inflation
Politicians seen as limited to what they can’t do or won’t do, and what won’t work quickly
With rising prices for everything from homes to food and even used cars, Canadians are worried that life is becoming even more unaffordable.
Several polls have shown affordability is one of the top issues for voters during the federal election. Official inflation numbers released this week by Statistics Canada added fuel to the fire, showing the Consumer Price Index rose by 3.7 per cent since last July.
As party leaders and platforms vow to make life more affordable, we spoke to several economists to look at just why things are getting more expensive, and what the federal government can do to help make things better.
When it comes to housing — the biggest single source of affordability angst — some of the things that would be likeliest to temper rapidly rising prices are the least likely to actually happen, said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives.
“There’s plenty that governments can do. Do I think they’ll all be done? No. Because a lot of them are politically unpalatable,” said Macdonald, pointing to two potential moves that could lower prices by dampening demand.
“Tightening up the mortgage stress tests would make a difference. Getting rid of the capital gains exemption on the sale of primary residences would make a big difference,” said Macdonald.
Mike P. Moffatt, assistant professor of business, economics and public policy at Western University’s Ivey Business School, says that federal politicians might want to try and make a difference, but argued that they’re limited in what they can actually do.
“There’s a limit, especially for the federal government. Most of the policy levers for making housing more affordable that we do have are at the provincial and municipal level,” said Moffatt.
The few tools directly available to a federal government won’t make much of a dent in reducing demand, Moffatt argued.
“We hear things like foreign-buyers taxes and speculation taxes and that kind of thing to get some of the demand out of the market. But that absolutely is tinkering at the margins. Dealing with the demand side issues is harder, because most of the people bidding on these homes are really just families trying to get into this market.
So it’s hard to stop that, and you really
wouldn’t want to,” Moffatt said.
Boosting the supply of housing — whether it’s new single-family homes, condos or rental apartments — is the surest way to help slow down the price increases, Moffatt said. Still, he warned, that will take time.
“Most of the solutions are going to have to come on the supply side, which is going to take a while. You can’t just build a home overnight,” said Moffatt.
While federal governments can — and do — directly fund the construction of affordable housing units, an even more fruitful approach toward increasing housing supply, said Moffatt, is to use the government’s financial leverage to nudge municipalities into action.
“A lot of the bottlenecks come from municipalities, through zoning regulations, through minimum parking regulations, you name it.
But municipalities are often cashstrapped, so that gives the federal government an opportunity to basically use their financial clout to create incentives for municipalities to change zoning,” said Moffatt, who pointed to a recent move by the City of Edmonton to reduce parking spots required for new developments.
“Research shows that will absolutely increase the amount of development. So what the federal government can do is say, ‘Look, this is a good policy lever for municipalities, but we also recognize that if we get rid of parking minimums, that’s going to create extra demand on public transit, so we’ll compensate the city financially,’ ” Moffat said.
While housing has been the biggest affordability worry, this week’s CPI numbers show there’s also other cause for concern, said Pedro Antunes, chief economist at the Conference Board of Canada.
Some of the increase can be explained, said Antunes, by what economists call the “base effect.”
The year-over-year increase of 3.7 per cent came partly because current prices were being compared with last July, when Canada was still in the depths of the COVID-related recession, and the economy hadn’t yet opened back up much.
But that still can’t explain everything, Antunes said.
“There’s still a bit of that base effect showing up in the numbers, but when you look at the Bank of Canada’s measures of CPI, which try and exclude some of the volatile items, or you look at month-over-month inflation, you’re starting to see real pressures emerge, I think from what is essentially excess demand, or tight supply,” said Antunes.
The excess demand, said Antunes, is because Canadian incomes have held up relatively well despite the COVID recession. The tight supply in goods, Antunes added, is partly because of disruptions caused by COVID.
“There’s not a whole lot we can do, given that it’s global supply chains,” said Antunes.
And those supply-chain glitches — such as container shortages in China and backlogs at global ports — aren’t going to be solved any time soon, warned Western University’s Moffatt.
“One of the issues was North America wasn’t selling that much to China so we weren’t sending back containers at the same rate, so now there’s a big container shortage in China. A lot of that is transitory, but transitory can still be a long time. We’re talking years, not weeks or months for all of this to play out,” Moffatt said.