Recent Canadian rate raises may exert downward pressure on consumption well after the current hiking cycle ends, research published by the Bank of Canada finds.
“Rate hikes not only increase mortgage payments temporarily but also reduce the share of these payments that pay off the principal,” the authors explain. “A few years of higher rates will therefore lead to a household having a larger remaining balance to repay, negatively affecting borrowers’ consumption in the future.”
The staff analytical note was written by Panagiotis Bouras, Joaquín Saldain, Xing Guo, Thomas Michael Pugh, and Maria teNyenhuis. The authors used central bank administrative data on mortgage contracts and Statistics Canada’s Survey of Financial Security.
Canadians’ disposable income, they say, decreased by 3% due to increased mortgage payments by April 2024 and should decrease by up to 5% by 2027.
Since markets expected a more gradual rate hike cycle, consumers renewed their mortgages at higher rates than expected, say the authors. Borrowers will face unexpected increases in their mortgage payments, they write.
“Increases in mortgage payments had reduced the consumption of mortgage borrowers by 2.8%, on average, by April 2024. This decline should continue and reach 3.8% in early 2028,” they find.
The researchers examined how rate hikes affect consumption by mortgage holders. “By April 2024, monthly mortgage payments had increased by about 9% on average since 2022 and will likely increase by 17% on average by 2027,” write the authors. They say 2027 will likely be the peak of increased mortgage payments and decreased disposable income.
The authors say the same phenomenon could be observed in the US in the same period.
