Poloz: High debt levels make Canada more sensitive to rate hikes
OTTAWA — It will take longer than expected for Canadian rate hikes to discourage consumer spending or spark deleveraging as most homeowners are sheltered from mortgage renewal risk until 2019 — and cheap loans are still available, economists said on Thursday.
The Bank of Canada raised interest rates on Wednesday, taking borrowing costs to their highest level since 2009.
But the overnight rate is just 1.25 per cent and the most popular mortgage, the five-year fixed term, costs only about three per cent, about the same as in 2012.
"Most people can absorb 100 basis points of rate hikes. When we start talking 150 to 200 basis points, it's a different story," said Rob McLister, founder of mortgage rate comparison website RateSpy.com.
About 70 per cent of Canadian mortgages have a fixed interest rate, but most reset several times within their 25- or 30-year amortization period. Some 47 per cent of outstanding mortgages will renew within the next year — meaning the bulk of borrowers will be locking in current rates, near historic lows.
"[That's why] we think it is going to take a little bit longer than people are anticipating to feed through, and it will be more meaningful next year," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
Canadian consumers have powered the country's economic growth for years, pouring so much money into the housing market that there are fears of a bubble, and racking up a record debt-to-income ratio of 171 per cent — meaning households owe $1.71 for every $1 they earn in disposable income.
Having already hiked interest rates three times in the past seven months, the Bank of Canada expects consumption to cool as debt costs force consumers to shut their wallets. But the bank's pledge to raise rates only gradually may prolong the debt binge.
"They are banking on consumption moderating going forward, but there's a risk that consumers are used to the big houses, the big cars ... so consumers may be more resilient than anyone is expecting," said Jean-Paul Lam, an economics professor at the University of Waterloo.
"As long as we live in an environment where credit is cheap and the economy is doing well, I don't see households retrenching a lot in terms of debt."