Is there really an "affordability crisis"?

So, can this be true? I think it probably is. But, if it is, it flies in the face of pretty much everything that politicians have been telling us for years, and everything that most people firmly believe about their own circumstances.

Everyone seems to believe that, even now, prices are through the roof, that it is harder and harder to make ends meet, and that earnings are just not keeping pace with inflation. This is the whole "affordability crisis" or "cost-of-living crisis" that we keep hearing about, whether it be sheepishly from the governing party or with righteous outrage from the opposition

Thing is, though, it's not actually true. Canadian inflation has been hovering around the Bank of Canada's target of 2% for the last year or so, and is expected to fall even further by the end of the year, to around 1.8%. Yes, inflation was much higher from 2021 to 2024, peaking at over 8% in 2022, and we are still feeling the effects of that to some extent. But inflation, in Canada and many other countries around the world, has been effectively tamed.

More to the point, though, data from the Bank of Canada and Statistics Canada, the two most prestigious and reliable sources of financial data for the country, agree that households in every income group, age group and occupational group have seen their after-tax income grow faster than prices over most of the past decade. Net financial assets have also increased for households across all income groups, even when excluding house and pension assets appreciation. In short, we are richer than we have ever been. Data from multiple sources shows that our standard of living has in fact continuously improved recently.

So, why is the cost of living still the major preoccupation of a sizeable majority of Canadians (about 62%), and pretty much everywhere else in the world? Why do we perceive that things are worse than they are, and getting still worse?

Well, the important word there is "perceive". For example, multiple studies have found that consumers' perceptions of inflation are influenced more by prices going up than by prices going down, and most of all by the prices of frequently-purchased goods such as food and gasoline. Their perceptions are also influenced by the rise in house prices, even though inflation only measures the costs associated with housing (utilities, rent, mortgages) and not the price of houses themselves. (In fact, the increase in house prices should make us feel richer, if anything.)

The other thing that is happening is that people's expectations may be overly optimistic, particularly because, although income has grown faster than prices for most Canadians over the period since 2009, it hasn't exceeded prices by quite as much as it did in the preceeding period from 1995 and 2009. (This is a worldwide phenomenon, not just in Canada.) So, if people are comparing their situations with that of their parents, or with earlier in their careers, then they may be disappointed and perceive themselves to be falling behind, even if objectively their situations have actually improved.

Take another circumstance into consideration, namely the ubiquity of social media. Comparing ourselves with others, some of whom may be richer than us, alters our financial reference groups and consumption norms, distorting our perceptions of "normal" and "necessary" consumption and expenditure. For example, many people are buying bigger cars, fancier phones, and travelling abroad more, but if you feel you don't have the money to keep up with these trends, you may well blame the cost of living for not being able to achieve these unrealistic goals.

So, there is a mix of economics, psychology and sociology going on. But the bottom line is that, actually, life has never been so good. Put that in your pipe and smoke it, Mr. Poilievre.