Posthaste: How Canada could have avoided the mortgage payment shock now ripping through the economy

financialpost.com:

Canada ranks among the countries hardest hit by higher interest rates in the developed world, but a new report says it didn’t have to be that way.

Since the Bank of Canada began hiking rates in 2022, the debt-servicing ratio of Canadian households has soared to one of the highest among the advanced economies. But if longer mortgage terms had been more prevalent and attractive, the payment shock would have been much more manageable, the report by the Fédération des caisses Desjardins du Québec said.

Right now, Canada’s mortgage market is concentrated in fixed-rate mortgages of up to five years. Longer terms do exist, but they are a tiny fraction of the market.

Meanwhile, borrowers in the United States were able to lock in historically low rates during the pandemic for 30 years. Canadian borrowers who took out a mortgage at those rates have already had to renew at much higher rates or will have to do so in the next two years.

With Canadian households among the most indebted in the world, this extra burden comes at a particularly challenging time, Desjardins chief economist Jimmy Jean and macro strategist Tiago Figueiredo said in their report.

The difference in the two countries’ mortgage systems has been credited as part of the reason Canada’s economy has underperformed the U.S. in recent years. Canadians, more vulnerable to higher interest rates because of shorter mortgage terms, have cut spending or run up other debt to make ends meet, while Americans have continued to spend freely.

Jean and Figueiredo say the financial vulnerabilities could become acute if inflation flares up again and the Bank of Canada is forced to hike rates further.

“Suffice it to say that new interest rate hikes would deal a blow to households