The Bank of Canada kept its key interest rate on hold Wednesday, and I have little doubt Canadian homeowners in variable rate mortgages or any lending vehicle tied to the prime rate are collectively breathing a sigh of relief.
Canadians’ $2-trillion mountain of household debt has been a constant source of concern for the Bank of Canada. And that’s not going away anytime soon.
Adding to the concern is a housing market that’s showing signs of softening. Six months ago when you could buy more home in the low interest rate environment, it was an easy decision. Even if your mortgage payment stretched you uncomfortably, you felt comfortable in the fact the value of your home was increasing and you could sell at a profit if you chose to.
That was then and this is now: rates are likely headed higher and home prices have fallen.
Central Banks around the globe would like to raise rates, but as borrowing costs continue to rise and the impact is not only on the household balance sheet, it will also increase the cost of borrowing for corporations and that means growth and further expansion could be compromised as borrowing costs escalate.
The ending of this story that no one wants to see is falling home prices, deteriorating corporate balance sheets, a weakened economy and ultimately a recession – the very thing the Bank of Canada was trying to avoid with this extended low interest rate environment.