In the Financial System Review, the central bank said that while the country’s financial system is strong and has dealt well with the pandemic, the economy remains vulnerable due to rising debt levels linked to the country’s increasingly expensive housing market. “Even when the average household is in better financial shape, more Canadians are rushing to buy a home during the pandemic,” Bank of Canada Governor Tiff Macklem said on Thursday. “And these households are more exposed to higher interest rates and the possibility of lower house prices.” The bank said assessing the risks associated with high household debt levels has become more complicated, but overall “vulnerability has increased”. About two-thirds of Canadians are homeowners, and about half of them own their entire home, while the rest have some sort of mortgage debt associated with it.
Rising lending rates have slowed the housing market
Housing prices rose by about 50 percent, on average, during the pandemic, as low interest rates allowed buyers to qualify for larger loans while keeping current payments relatively affordable. After lowering its key interest rate at the beginning of the pandemic, in March 2022 the bank began raising its key lending rate from 0.25 percent at the beginning of the year to 1.5 percent today, and the impact on the housing market has was almost immediate, with sales volume slowing down, along with average selling prices. “Given the unsustainable power of housing, moderation in housing would be healthy,” Macklem said. “But high household debt and rising house prices are vulnerabilities.” As part of its analysis of how resilient the financial system is to various shocks, the bank looked at how the impact of higher interest rates and lower selling prices could be. As part of this, the bank has dropped figures on what might happen to recent homeowners’ mortgages when their loans come in for a five-year renewal. The bank predicts that in 2025 and 2026, floating-rate loans will cost 4.4 percent over five years, while fixed-rate loans will be slightly higher at 4.5 percent. Both scenarios are about two percentage points higher than what is available on the market today.
The cost of mortgages can increase by 30%
Under this scenario, the 1.4 million Canadians who took out a home loan in 2020 or 2021 would see their average monthly cost increase by $ 420, or 30 percent when renewed. The impact on fixed rate borrowers would be slightly lower, as they would see their payments go from an average of $ 1,260 to $ 1,560 a month for a 24 percent increase. However, floating-rate borrowers are even more vulnerable, according to the bank, as their standard monthly payments range from $ 1,650 a month right now to $ 2,370 when they renew. This is a 44 percent increase. “If those in over-indebted households lose their jobs, they will probably need to cut back on their expenses to continue servicing their mortgage,” Macklem said. “This is not what we expect to happen … But it is a vulnerability to watch carefully and manage it carefully,” Macklem said.
