Rising interest rates could hurt those who have taken on heavy debt lately to afford their dream home, notes the Bank of Canada. But she will raise them anyway. And maybe even a little more than she initially thought.
As it begins to really accelerate its interest rate hike this spring, the Bank of Canada has promised to pay particular attention to the repercussions this could have on Canadian households, which are known to be heavily indebted. Its annual review of the financial system came on Thursday to paint a first overall picture of the situation.
Good news, they say. The average household wealth in Canada has paradoxically increased by $230,000 during this unique economic crisis caused by the COVID-19 pandemic and the measures deployed to combat it.
The majority of this enrichment ($153,000) is attributable to the increase in the value of homes by almost 25% in one year and more than double since April 2020. Another big chunk ($74,000) came from the rise in stock market values which, despite their recent decline, remain around 15% higher than they were before the pandemic. And then there are all those financial aid programs from governments during the darkest days of the crisis and all that money that we saved because we no longer went back and forth between home and office, that we no longer went out to restaurants or that we no longer traveled abroad, and which made it possible to replenish our woolen stockings ($19,000).
Yes, good ! All this also came, for some, with new mortgage debt, but this only reduced the average two-year enrichment by just under $17,000 per household.
But now, “to assess the vulnerability of households, it is not enough to stop at the average figures of their balance sheets,” admits the Bank of Canada. In fact, the increase in wealth of which she speaks “masks significant variations in the distribution and composition of household balance sheets”.
Of houses, stocks and savings
One could, for example, start with the effects of inflation that it must combat. While just over half (56%) of the richest 20% of Canadians report that the rise in prices has “a little” or “a lot” affected their ability to afford their expenses, this proportion climbs to 85 % for the fifth of the poorest, reported Thursday Statistics Canada.
The increase in housing values could also only benefit those who owned them, which is the case for just under two-thirds (63%) of Canadian households, the Bank recalled on Thursday. from Canada. Among these owners, 44% have finished paying for their house and do not care about the increase in interest rates. As for the other owners, more than 70% took fixed rates which give them a little time to see what happens, which leaves 10% of Canadian households with a variable rate mortgage.
However, with low interest rates and the escalation of house prices, we have seen, in recent months, more and more households ready to go into heavy debt using variable rate mortgages in order to afford the accommodation they coveted. Usually 15% to 20%, the proportion of new mortgages whose value exceeded 450% of household income was approaching 27% at the latest news. Rarely in the past, such debt ratios are also increasingly accompanied by variable interest rates (18%) and even come with an amortization period exceeding 25 years (15%).
Attention danger
If economists are correct that the total increase in interest rates will be about 2.5 percentage points in Canada, everyone who has negotiated their mortgages over the past two years will, sooner or later, face average increases in their payments of $300 per month, for those who were at fixed rates, but more than $1,000 for the most indebted who were at variable rates, estimates the central bank.
If the most vulnerable households were to suffer income losses at the same time and see their borrowing power diminish due to the marked drop in the value of their homes, their financial situation would become really very complicated, candidly observes the Bank of Canada. It’s unclear where the recent housing market slump will end, she said. But one thing is certain, more and more voices evoke the prospect of an economic recession caused in particular by the accelerated raising of interest rates by the central banks.
“If many households find themselves in this situation, there could be broad implications for the economy and the financial system,” Bank of Canada Governor Tiff Macklem warned Thursday. However, this is not what we anticipate. Our objective is a soft landing for the economy and a return of inflation to the 2% target. »
And to do this, the central bank will have to “quickly” bring its key rate – which is currently at 1.5% – to the zone where it will stop stimulating growth and which it places in a range between 2% and 3%. %. And even “possibly above,” warned Tiff Macklem.
“The economy is overheating,” hammered the governor. “It can support higher interest rates. It needs higher interest rates. [Mais] it will be delicate and it will come with risks. »