Heftier mortgage payments will keep throttling consumer spending long after rates fall
By Murtaza Haider and Stephen Moranis
Sudden increases in mortgage payments place a heavy burden on household budgets, forcing families to cut back on other goods and services. Even when mortgage rates decrease, the reduction in consumer spending persists, affecting retail, tourism, and other industries. This leads to reduced government revenue from sales taxes on consumer goods.
Mortgage rates began to climb in Canada in early 2022. The hikes first affected those with variable-rate mortgages. However, most Canadian mortgagors have fixed-rates, allowing them to avoid higher payments in the short term. Nevertheless, given that the typical mortgage term is five years, nearly all borrowers must refinance by 2027. This suggests that the peak decline in consumer spending has yet to materialize.
In a study released in June, Panagiotis Bouras and others at the Bank of Canada estimated the decline in consumer spending caused by homeowners’ higher mortgage burdens. They found that mortgage payments increased by nine per cent from early 2022 to April 2024 but have yet to peak. The study estimates that payments will be about 17 per cent higher in 2027 relative to early 2022.
The authors found that, net of mortgage payments, the average household disposable income declined by three per cent in April 2024 relative to early 2022 and will likely decline up to five per cent by 2027. This implies that, on average, Canadian households will have lower purchasing power thanks to expensive mortgages.
The decline in disposable income affects households with liquidity differently than those without it. Households without liquidity, which are asset-poor, consume all of their disposable income. In contrast, unconstrained households with assets
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