Posthaste: Canada's mortgage crunch is already hitting the economy — and it's going to get worse
The growing burden of mortgage payments as homeowners renew under much higher interest rates has roused concern from policy makers to politicians.
Canada’s household debt, at 187 per cent of disposable income, is among the highest of Organization for Economic Cooperation and Development countries and has long been considered the economy’s biggest vulnerability.
That debt burden now amounts to $2.9 trillion, with mortgage debt making up 74 per cent of that, says a new study from TD Economics. With the increase of 300 basis points in mortgage rates, Canadians are now allocating 15.4 per cent of their income to pay their debts, up from 13.6 per cent in 2020.
That’s higher than the 13.2 per cent Americans were paying to service their debts at the peak of indebtedness just before the Great Financial Crisis.
So how does that affect the economy?
As more homeowners are forced to renew at higher mortgage rates, they have less disposable income to spend on goods and services that drive the economy.
Consumer spending has been dropping in Canada, but up until now the direct effects of higher mortgage debt on that spending were unknown, said James Orlando, senior economist at TD Economics and author of the study.
To find out TD Economics used internal anonymized credit card and mortgage data to track how borrowers were responding to higher interest rates.
“When the Bank of Canada (BoC) first started increasing its policy rate in early 2022, we knew that tough times were coming for Canadian households,” said Orlando.
“What we found was that as the BoC kept hiking rates, consumers that held a mortgage started spending less relative to those without a mortgage.”
About 1 per cent less, the study determined, which adds up to a $6 billion
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