Every month, Statistics Canada provides Canadians with a snapshot of our ever-changing cost of living through the Consumer Price Index (CPI).
For some of the goods covered in the CPI—such as food—measuring cost is as simple as scanning a jar of peanut butter. When it comes to tracking the cost of keeping a roof over your head, however, things are slightly more complicated.
Shelter is the most important component in the CPI, representing more than a quarter of the expenses profiled. Both rental and owned accommodations are covered in the index, and a unique methodology is applied to obtain information on both types of housing.
A "pure" measure of rental costs
The rental component of the shelter index looks at the amount paid by a tenant from one month to the next and focuses on fluctuations in cost, independent of any changes in the characteristics of a rental unit. For example, if a landlord ceases to include heating in the rental price, an adjustment is made to ensure that any movement in price is a “pure” change—and does not reflect a change in the dwelling itself. This nuance sometimes leads to confusion when the CPI is compared to other data sources.
Say you’re offered two very similar jobs, one in Ottawa and one in Montréal. You love both cities and decide to base your decision on the cost of living—and its changes over time—in each place. Knee-deep in the search for an apartment, you consult both the CPI and other data sources for information on the changes in average rental costs in these two cities, only to discover that the other sources show steep rent increases that are not reflected in the CPI. What is going on?
The difference is that most other data sources don’t account for changes in the amenities and services offered to tenants nor are they adjusted to reflect changes to the rental stock, such as renovations or the appearance of new units on the market. In this sense, the CPI is a more accurate indicator of inflation: rather than providing information on average rental prices, the index tells you how quickly rental prices are increasing or decreasing.
Back to our dilemma. If you find an apartment in Ottawa and one in Montréal at the same price, it might be worth consulting the provincial CPI: seeing how quickly rental prices are increasing or decreasing in Ontario and Quebec could help you decide where to move if you want to maximize your savings on housing over time.
What about homeowners?
Measuring rental accommodation is fairly straightforward. But what happens when you own the property?
In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses.
Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?"
This distinction explains why skyrocketing housing prices in British Columbia are not reflected in the relatively modest increases in the shelter index for that part of the country. The index shows the cost of living in these homes rather than the cost of acquiring them.
One index meets many needs
In reality, there is more than one approach to measuring changes in the cost of owned accommodation and every statistical organization adopts a method according to its own objectives. For example, a popular method with some economists is to zero in on the purchase price alone. It is argued that this is especially useful for monitoring monetary policy.
The Canadian CPI, in addition to informing monetary policy, must also support indexation. Indeed, the index is widely used to adjust tax brackets, rent controls, transfer payments and pensions for the erosion in purchasing power caused by inflation. This is why Statistics Canada looks at rental and owned accommodation in the way it does: to simultaneously support these adjustments and to inform monetary policy, the CPI must paint an accurate picture of what it truly costs to run your home.
For more information on this topic, please see Shelter in the Canadian CPI: An overview.