A more resilient job market and unspent excess deposits may provide support
Canadian households may be able to manage an increase in debt servicing costs, according to a report by TD Economics.
Maria Solovieva, an economist with the firm, said that the job market has been more resilient than expected and largely unspent excess deposits may provide ample support for an average Canadian household when it comes to managing an increase in debt servicing costs.
Solovieva stated that the fastest increase in interest rates seen in decades meant that Canadians that were renewing their mortgages with rates that they did not foresee at the start of their terms.
“By the Bank of Canada’s estimates, roughly 50% of mortgages that were initiated before interest rate hikes began will face higher rates by the end of this year,” said Solovieva.
“In some cases, this will increase their monthly payments substantially, weighing on discretionary spending,” she added.
With families needing to allot more for debt payments, Solovieva estimated that increased mortgage payments have reduced real consumer spending.
Support for Canadian households
By the end of 2024, the report said that Canadian families would need to allot an average of 30% more on their budgets for their monthly mortgage payments. However, the growth of mortgage payments is forecast to slow down next year and remain flat in 2025 but will eventually pick up again in 2026.
“The combination of high debt levels and slower income growth will create an enduring drag on consumption and broader economic growth in turn. This results in Canadian consumer growth lagging that of the US for the next few years,” said Solovieva.
“Still, without an unexpected economic downturn, the mortgage renewal cycle is unlikely to trigger an economic crisis,” she added.
The economist stated that the slowdown in the job market is forecast to be less severe than past economic downturns.
“This should place a floor under incomes to manage the increase in debt servicing costs,” said Solovieva.
Another factor that may mitigate the plight of Canadian households with regards to their mortgage payments is the $140 billion in excess deposits that remain untouched.
“Almost all these resources are kept in less liquid term products, suggesting that Canadians may have put them aside anticipating higher costs,” said Solovieva.
“Channelling these savings to offset the upcoming income shock should soften the blow and support an orderly renewal cycle.”
