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Higher rates are also slamming the brakes on Canada's once
red-hot housing market and, as consumers feel the pinch, could
slow spending on travel, dining out and luxury goods.
The central bank raised its policy rate by 100 basis points to
2.5% on Wednesday, its largest increase in nearly 24 years. Its
aim is to crush hot inflation, which hit a four-decade high of
7.7% in May, with the bank promising more hikes to come.
Money markets are betting on three more increases this year to
get the policy rate to 3.5%-3.75% by year-end. [0#BOCWATCH]
"There's going to be a lot of pain out there. And I think the
bank is underestimating the risks to both housing and
consumption," said Stephen Brown, senior Canada economist at
Capital Economics.
The moves have sent mortgage rates spiraling, a concern for
Canadians with variable rate mortgages, which accounted for
about 50% of new mortgage loans in Canada in May, compared with
about 7% pre-pandemic, official data shows.
"I am distraught," said Udit Kumar, who bought a suburban
Toronto home this spring. The rate on his variable mortgage has
already jumped from 1.84% to 3.4% in just a few months.
"We now find ourselves in a situation where the value of our
houses might be going down and the mortgages are going up," he
said.
Most Canadians with variable mortgages have static payments: as
rates go up the monthly installment stays the same but less
principle gets paid. But about 20% of variable loans are not
static - meaning each hike can add hundreds of dollars to a
payment.
For example, a monthly payment of C$2,845 ($2,171) on a typical
home will go up by C$323 because of the jumbo hike, according to
Lowestrates.ca.
Toronto-area mortgage broker Ron Butler said he was already
hearing from people worried about having to sacrifice groceries
to pay their mortgages. But while the situation is painful for
many, he does not foresee a wave of defaults due to Canada's
record low jobless rate, he said.
"In the history of banking in this country ... rate increases
have not had a massive impact on mortgage default. No matter how
fast and no matter how big."
Still, with social media full of people lamenting their suddenly
supersized payments and plunging home values, real estate agents
say Wednesday's 100-bp hike has cast another chill over Canada's
already cooling housing market.
"Everybody just freezes when this happens," said Dan Plowman,
who owns a real estate agency in Durham, a suburban area east of
Toronto.
The average selling price in the Toronto area dropped 14.1% in
June from February's peak, reversing some of the region's hefty
pandemic gains.
Brown of Capital Economics expects housing prices nationwide to
fall about 20% peak-to-trough and he's concerned the Bank of
Canada is perhaps too quick to sacrifice the housing market in
order to cool inflation.
But a chill may be just what the Bank of Canada is looking for.
Senior Deputy Carolyn Rogers reiterated on Wednesday that
restoring balance in the Canadian housing market would help curb
the excess demand fanning inflation.
"And that's what we're aiming to do," she said.
($1 = 1.3105 Canadian dollars)
(Reporting by Julie Gordon in Ottawa; Editing by Richard Chang)
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