Rents continue to push inflation up, and that’s bad for homeowners

Posted on July 25, 2024 by admin

The latest numbers show inflation rising from 2.7 per cent in April to 2.9 per cent in May. It’s a small increase but a move in the wrong direction and enough to cast doubt on whether the Bank of Canada will continue to cut interest rates next month.

For over a year, the two main contributors to inflation have been mortgage interest costs and rents. Since the Bank of Canada won’t lower interest rates unless inflation comes down, controlling rents is the best strategy to rein in inflation.

Governments cannot control many factors driving inflation, but they can control rents if they choose to.

At the onset of the current high inflation period in 2021, supply-chain bottlenecks and energy costs were the main factors behind price increases.

The COVID-19 pandemic disrupted production in multiple ways, making many products less available and more expensive. For example, new cars became hard to find, and prices went up. Russia’s invasion of Ukraine drove up oil prices and, with it, the price of goods and services that require fuel and transportation – which is almost everything.

But that’s not what’s driving inflation today.

Between May 2023 and May 2024, mortgage interest costs rose 23.3 per cent and rents 8.9 per cent, compared to the 2.9 per cent headline inflation figure.

Like many other countries, Canada is using interest rate increases to fight inflation. The general theory is that as firms and individuals spend more on servicing their debts, they will have less money to spend on everything else, slowing down the economy and pulling prices down. It’s a bitter pill. Economic slowdowns fuel unemployment, hurting workers the most.

Higher interest rates also make mortgages more expensive. Homeowners with variable-rate mortgages feel the pinch right away, while those on fixed-rate mortgages are hit when they renew their mortgages.

Data on rents shows that whenever interest rates shoot up, rents follow suit because landlords pass increased mortgage costs on to tenants. Even if landlords’ costs don’t increase much – buildings are often financed through 10-year fixed-rate mortgages, and many have long been paid for – high inflation and high interest rates give predatory landlords a handy excuse to hike up rents.

International production supply chains and oil prices may be largely out of the hands of national and provincial governments, but rents are not.

Provincial governments have the authority to impose or strengthen rent controls, but they’re not doing so. In provinces where controls currently don’t exist – Alberta, Saskatchewan, New Brunswick, and Newfoundland – governments are simply looking the other way.

Nova Scotia has extended its temporary and weak rent controls, which is a wiser, if timid, move.

Where controls exist – P.E.I., Quebec, Ontario, Manitoba, and B.C. – loopholes like vacant unit exemptions, new-unit exemptions, and applications for additional increases allow landlords to hike rents. Last year, Ontario landlords increased rents in vacant units by an average of 36 per cent.

Blaming the federal government for high inflation is easier than confronting powerful landlord lobbies. So that is what the provinces are doing.

That said, the federal government could act, too.

In the mid-1970s, one of Ottawa’s main anti-inflation measures was to persuade provinces to impose rent controls. It worked. When inflation hit 12.5 per cent in 1981, rent inflation was 6.4 per cent. Controlling rents helped tame inflation.

Today, uncontrolled rents are pushing inflation up.

In its 2024 budget, the federal government announced the creation of a Renters’ Bill of Rights. So far, it looks like this Bill will not include rent controls; a grave mistake.

If inflation doesn’t decline, the Bank of Canada will keep interest rates higher for longer, costing tenants and homeowners dearly.

The solution is simple – bring in strong rent controls across the country. Now, not later.

Ricardo Tranjan, PhD, is a political economist with the Canadian Centre for Policy Alternatives and author of The Tenant Class.

© Troy Media