The results of the Manulife Bank survey are causing a stir. Nearly one in four homeowners say they will have to sell their home if interest rates rise further. And no less than 18% of owners think they can no longer afford the accommodation they own.
The press release from the institution is titled Buyer’s remorse?. The Manulife Bank survey was conducted April 14-20. The Bank of Canada had just ordered a 50 basis point increase in its key rate, in addition to the 25 point increase in March, to push it to 1%. This rate has been at 1.5% since June and it would only be halfway through the expected tightening, assuming that we manage to control inflation.
The context of persistent high inflation should push the key rate to 2.25% at the end of the summer and to 2.5%, or even 2.75%, at the end of the year, economists believe. For their part, the projections observed on the bond market are based on a target rate of 3% next year, a far cry from the 1.75% before the pandemic. If the central bank is forced to venture beyond the so-called neutral rate, the landing is likely to be felt much more heavily.
Moreover, even before this expected surge, nearly half of respondents said they would find it difficult to manage unforeseen expenses or that they would reconsider their plans for summer vacation. More directly, 42% indicate that their expenses exceed their income.
As for homeownership affordability, 71% of respondents to the June 2021 survey who did not own their home said they feared not being able to save enough to buy one. Today, the housing market has become completely out of reach for two-thirds of those polled.
In contrast, less than half of respondents say they are prepared for higher interest rates (46%), inflation (42%) and housing prices (40%), “which highlights how harmful further increases in these elements could be for many Canadians,” said Manulife Bank.
Not to mention that the proportion of outstanding variable-rate mortgages fell from 28.1% in the fourth quarter of 2021 to 30.7% in the first quarter of 2022, Statistics Canada tells us.
The federal agency published the same day as Manulife its National Balance Sheet and Financial Flow Accounts for the first quarter of 2022. It was observed in particular that household credit market debt as a proportion of disposable income fell to to 182.5% in the first quarter, after peaking at 185% three months earlier. This “improvement” is not unrelated to the fact that household debt increased less rapidly than disposable income, ie +2% and +3.3% respectively.
In addition, the household debt service ratio, which is the total of obligatory principal and interest payments on debt in the credit market as a proportion of disposable income, stood at 13.48% in the first quarter, down from 13.72% in the fourth quarter of 2021. “This is the first decline since the second quarter of 2021”, indicates Statistics Canada, to add that household disposable income before payments interest increased by 3.2% compared to a 1.5% increase in total debt payments.
But, here again, we are talking about the first quarter of 2022, which is home to the start of the central bank’s monetary policy tightening with a first increase in its key rate, by 25 points, in March.
The firm tone of the Bank of Canada
In April, the Bank of Canada had revised upwards its estimate of the neutral rate, ie the interest rate compatible with production that remains at its potential level for a long time and an inflation rate that remains on target. Its estimate is now between 2% and 3%, against 1.75% and 2.75% at the start of the year. “If demand responds quickly to higher rates and inflationary pressures ease, it may be appropriate to temporarily halt our tightening once we get closer to neutral, and take stock. On the other hand, we may need to raise rates a little above neutral for a while to restore the balance between supply and demand and bring inflation back to target,” she said. taken care to warn.
At the beginning of June, the bank abandoned any reference to the neutral rate. “Given the excess demand in the economy and inflation that remains well above target and is expected to continue to rise in the near term, Governing Council still believes that interest rates will have to increase further […] The Governing Council stands ready to act more forcefully if necessary to honor its commitment to achieve the 2% inflation target. The tone became firm.
The Manulife Bank of Canada survey was conducted among 2001 Canadians between the ages of 20 and 69 from all provinces with household incomes above $40,000. It was produced online by Ipsos, from April 14 to 20, 2022.
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