Higher home costs fueling inflation

The rising cost of home ownership is finally starting to fuel inflation.

Last month, the cost of carrying a Canadian mortgage rose more than it has in over 16 years as home prices continued to climb, according to Statistics Canada's October Consumer Price Index (CPI) report.

"It took a lot of time for upward pressure on home prices and mortgage rates over the past couple of years to feed through, but now we're seeing that more significantly, and I would see that as an inflation risk going forward," said Adrienne Warren, senior economist at Bank of Nova Scotia.

The cost of the interest on a mortgage grew 6.7 per cent in October, the highest monthly increase since June, 1991

Most of that spike was caused by a sustained increase in house prices, which is leading buyers to borrow greater amounts of money and boosting taxes as property values go up. Last month, property taxes across the country rose 3.8 per cent from October, 2006.

Since 2000, the cost of both new and resale homes has been climbing steadily across the country. The average price of a resale home in Canada is expected to ring in at $305,200 in 2007, an 86-per-cent increase from the average of $163,992 in 2000 and a 10.2-per-cent rise from 2006, according to data from the Canadian Real Estate Association (CREA).

Even if mortgage rates and prices level off, mortgage interest will likely continue to put pressure on inflation, Ms. Warren said.

Homeowners do appear to be getting some relief from lower insurance rates, maintenance and repair costs, said Derek Burleton, senior economist at Toronto-Dominion Bank.

"There are some offsets. Unless you believe that either interest rates are going to spike or incomes are going to fall dramatically, both of which are highly unlikely, the interest burden should continue to be manageable," Mr. Burleton said.

However, some buyers, particularly in areas where affordability has dropped dramatically in a short time, appear to be getting pushed out of the market.

In Alberta and Saskatchewan, for example, resale home prices are expected to increase 25.3 per cent and 28.9 per cent, respectively, in 2007, far outpacing price gains in the rest of the country, according to CREA.

Lack of affordability in cities such as Calgary and Edmonton has caused a boom in the rental markets, said Rob Geremia, president of Boardwalk Real Estate Investment Trust.

"If you look at the difference between the average carrying cost of a condominium unit in Calgary and the cost of a similar rental unit, we're at a historical high spread of approximately $900 per month," Mr. Geremia said.

Higher mortgage rates are of serious concern to brokers who, in the past three months, have seen the banks slash the discount on their posted mortgage rates, said John Panagakos, owner of Toronto brokerage Mortgage Centre.

His clients are paying a lot more to own a home, he said. "People are qualifying. Affordable is a different question. Almost everyone I'm talking to is taking out 40-year amortizations to qualify."

(prepared by Lor McCleod/Globe & Mail)