The Bank of Canada is More Worried than Usual about Debt

The Bank of Canada’s recent discussions regarding debt and increasing interest rates have sparked concerns about the future of the housing market and the financial well-being of Canadian households.

In a segment by CBC News, Natalie Kalata says the Bank of Canada is juggling higher interest rate payments and that this shock is expected to be felt over the next few years. 

Debt is a major issue many Canadians face on a daily basis. In January 2023, the Fraser Institute released a report projecting a combined federal and provincial net debt in Canada of $2.1 trillion in 2022/23. The Canada Mortgage and Housing Corporation (CMHC) says the residential mortgage debt hit a record of $2.08 trillion in January, up 6 per cent in a year. In other words, Canadians owe more than they own. 

The CBC News segment emphasizes the challenges posed by higher interest rate payments and the potential impact on mortgage holders. Carolyn Rogers, Senior Deputy Governor of the Bank of Canada says, “About one-third of households have seen their mortgage payments increase since February 2022, just before the bank started raising the policy interest rate.”

As households renew their mortgages in the coming years, more will face higher payments, adding to their financial burden. 

Omar Hashem, Broker of Record at Lotful Realty, a boutique brokerage specializing in residential sales and investments in Ottawa, emphasizes that the purpose of Bank of Canada interest hike raises is to reduce what is left after you pay– essentially to reduce demand on other items. Hashem continues, “We should introduce taxation during times like this — taxation to specific items to curb demand rather than an interest rate campaign designed to hurt everyone.” 

According to the Bank of Canada’s latest report assessment of risks to the country’s financial system, over the last couple of years, households have stretched their budgets to get into the housing market. Additionally, Canadians are taking longer to pay off their mortgages. Last year, over half of new mortgages were stretched out over a longer period. 

As interest rates rise, real estate investors are also feeling the impact. Canadian real estate franchiser, Royal LePage, revealed that a large percentage of Canadians own investment properties, with some owning multiple units. According to an online poll, 11 per cent currently own an investment property, while 32 per cent of investors own two or more properties, and multiple property owners are more likely to be aged 18 through 34 than 35 and older. Additionally, more than 30 per cent of investment property owners are considering selling. 

The tightening interest rates and increasing debt levels have prompted investors to reconsider their options as negative returns in the stock market become a deterrent. 

In an interview with Global News, Phil Soper, CEO of Royal LePage says, “People get into the sector and decide they do not like being a landlord.” 

Data from the Canadian Mortgage and Housing Corporation (CMHC) showed residential mortgage debt hit a record of $2.08 trillion in January, up 6% in a year. 

William Huggins, a finance and economics lecturer at McMaster University tells CBC, “As a result of really low interest rates, people sort of moved out of a lot of traditional investments like bonds and realized they could make money in real estate.”

He continued saying low interest rates translated to low mortgage rates. As a result, people moved towards home ownership. When people buy more, then they owe more.

Huggins advises Canadians to trim back on non-essentials if possible. However, for those who have already made these adjustments and find themselves in a situation where borrowing is necessary, managing this situation becomes crucial. Huggins emphasizes the importance of avoiding payday loans. 

“Call your creditor ahead of time if you feel like you are going to be late with a payment or can only make a partial payment. Do not wait until the last minute to make adjustments,” he continued. 

The Bank of Canada's concerns about rising debt and the implementation of interest rate hikes have sparked discussions on the implications for the housing market and the financial well-being of Canadians. Individuals and investors must assess their financial situations, consider proactive measures, and make informed decisions to navigate these changing economic circumstances.