We had fun estimating the impact of rising rates on mortgages in Canada by consulting the financial statements of the banks on the 4e quarter of 2022, as well as analytical reports from Canadian banks, through Statistics Canada, CMHC, and the Bank of Canada. First, the mortgage market in Canada is valued at $1,463 billion and the mortgage line balance at $268 billion.
Variable rate mortgages represent 34% of mortgages, so we can assume that if interest rates do not fluctuate more over the next 12 months, variable rate mortgages will cost $21 billion more in interest charges. Even though three-quarters of variable-rate mortgages come with a fixed payment, according to the BoC, we must consider that consumer confidence will be affected. The impact is more immediate on mortgage margins where the 4.25% increase will add an additional $11 billion in interest for the next 12 months. We are therefore talking about a total of $33 billion for the next year. To put this cost into perspective, let’s say that it is equivalent to approximately 1.7% of Canadian GDP.
This value represents only the impact of the increase in rates on variable rate mortgages and does not take into account the renewal of fixed rate mortgages which will be at much higher rates than during the previous term.
Even if the impact does not yet appear on mortgage payments, three quarters of this increase in rates increases household debt relative to disposable income, and this is already often at a dangerously high level, i.e. 182%. For comparison, this ratio is 101% in the United States.
The cost of real estate has already started to drop in Canada, but for all its reasons, it is anticipated that the supply of homes for sale will increase significantly in the spring and, combined with the lack of affordability and the economic downturn, we believe that the cost of real estate will fall further. It is certain that immigration could alleviate this situation in part, but we really need to make our clients aware of the fact that the cost of real estate will continue to fall and that this will have a negative effect on economic growth in Canada.
Liability management is an integral part of the client’s financial situation and sometimes even represents “the” largest part of it. It is therefore essential to entrust the analysis of it to an objective professional who will know how to guide him and ensure that he understands its value. After all, isn’t liability management itself just as important as asset management?
