Bank of Canada Governor Tiff Macklem conceded that rate hikes have hit the country’s homeowners hard, saying the impact of higher borrowing costs on consumers is a major reason why he chose to hit pause before the U.S. Federal Reserve.

In an interview with Bloomberg News, Macklem said the central bank needs time to gauge how households and businesses are adapting to higher rates before it makes any further moves. 

Canadians “are more indebted today than they’ve ever been,” Macklem said after a speech Tuesday in Quebec City. Although some households were able to build up cash reserves during the pandemic, “extra savings are probably not going to last as long as the higher debt.”  

The governor’s comments underscore the uncertainty faced by policymakers as the economy — and Canada’s richly-valued housing market — are tested by the highest interest rates in 15 years.

Macklem was the first Group of Seven central banker to pull the trigger on outsized rate increases last year and he’s the first to explicitly say he’s planning to hold them now. That puts the Bank of Canada on a different path than the Fed, where Chair Jerome Powell reiterated Tuesday that rates may need to keep rising in order to quash inflation, roiling the bond market.

Canada’s rate increases, which have moved the benchmark overnight lending rate to 4.5 per cent from 0.25 per cent in less than a year, have crushed home sales and sent prices tumbling in some markets. The national benchmark price has dropped 13 per cent since the peak, and buyers have largely stayed away until the future of mortgage rates becomes clearer.

“We have seen a very sharp slowdown in housing, but given how rapidly we raised interest rates and how much we raised them, that is broadly in line with what our models would have suggested,” Macklem said. 

The real estate market will probably soften further before it stabilizes later this year, he said. 

Macklem stressed the difficulty of predicting exactly how the economy will absorb the hikes. Some borrowers with fixed mortgages are spared the pain until they renew at a higher rate, while those with floated-rate loans are already feeling it.

“If you bought a house at the peak of the market with a variable-rate mortgage or a high loan-to-value mortgage, the rapid increases in interest rates have hit you pretty hard. You’re probably feeling very squeezed,” Macklem conceded.