Why household debt might not be the economic killer we thought it was

Impact of Rate Hike Payments Not Enough to Push Us into Recession, Study Finds

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You can bet that one thing the Bank of Canada is keeping an eye on as it raises interest rates is Canadian household debt.

Canada ranks in the top 10 among OECD nations for the highest levels of household debt as a percentage of disposable income, above the United States and the United Kingdom

There has been a lot of concern about how Canadians are going to manage this debt as interest rates rise while at the same time facing the highest inflation they have seen in 40 years.

“For heavily indebted households, the bill could be high,” National Bank of Canada economists Matthieu Arseneau and Daren King wrote in a recent study.

Canadians who took out mortgages for 4.5 times their gross income, a common practice when home prices soared during the pandemic, could see payments rise from $187 to $281 between 2022 and 2024, which would absorb between a 2.6% and 4% of their net income, they said.

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But at the macroeconomic level, it’s a different story, economists argue. And here’s why.

Canadians’ cumulative debt at the end of 2021 was $2.657 billion, but not all of it is affected by rising interest rates.

With insured ($520 billion) and uninsured ($891 billion) fixed-rate mortgages, the effect will only be felt gradually as mortgages roll over.

Variable rates, of course, go up as prime interest rate goes up, but for 67% of these mortgages, national estimates, the payments are fixed.

Only about 33% of adjustable-rate mortgages ($181 billion) will see payment increases as the Bank of Canada raises rates.

Also, although 63% of households in Canada own a home, according to the 2019 Financial Security Survey, almost half of them do not have a mortgage.

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“This means only 35% of households will have to deal with higher payments or home equity loans and lines of credit,” National said.

National estimates that Canadian households will have to pay an additional $30.4 billion from 2022 to 2024 due to higher interest rates. For the three years accumulated, that is equivalent to 0.65% of disposable personal income.

Given that real disposable income grew by an average of 2.2% each year over the past decade, a payment shock of 0.65% over three years “should slow consumption down a bit, no more,” they wrote.

“While this is significant and is expected to moderate consumption, in our view this shock alone is not enough to push the economy into a recession.”

However, observers are not wrong to worry about recession risks, the economists said. The payment shock is just one of the ways that rising rates will affect the economy.

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The wealth of Canadians will also be affected by the fall in the stock and housing markets, which will further undermine confidence, not only among consumers, but also among businesses and industry.

“It’s hard to say what will be the last straw that will break the camel’s back,” they said.

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SINK HOLE STOCK SINKS Shares of Toronto-based Lundin Mining Corp. fell to their lowest level in a year on Tuesday after a sinkhole about 32 meters wide and 200 meters deep opened near its Chilean copper mine during over the weekend, forcing the miner to suspend work. The company, which is investigating what caused the hole, says workers and infrastructure were not affected and production is unlikely to be affected either. Still, the news was enough to send Lundin down almost 7% in TSX trading on Tuesday. Photo by Johan Godoy/Reuters

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  • Deputy Prime Minister Chrystia Freeland and Wayne Long, Liberal MP for Saint John-Rothesay, will visit Port Saint John, New Brunswick, to meet with workers and discuss supply chains.
  • Foreign Minister Melanie Joly will meet her German counterpart, Federal Foreign Minister Annalena Baerbock, in Montreal
  • Ontario Premier Doug Ford and Monte McNaughton, Ontario Minister of Labour, Immigration, Training and Skills Development, will make an announcement in Stratford, Ontario.
  • Harjit S. Sajjan, Minister for International Development and Minister responsible for Canada’s Pacific Economic Development Agency (PacifiCan), will announce funding to support BC aerospace organizations
  • The Professional Association of Real Estate Brokers of Quebec will publish July home sales figures
    Greater Vancouver Real Estate Board to Release July Home Sales Figures
  • Today’s data: US ISM Services Index, US Factory Orders
  • Profits: Nutrien, Sun Life Financial, Great-West Lifeco, Brookfield Infrastructure Partners, Iamgold, B2Gold, Algoma Steel Group, NFI Group, Ovintiv, Yum! Brands, eBay, Robinhood Markets, Under Armor

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Inflation is making almost everything cost more, but are Canada’s handful of dominant supermarket chains raising prices more than necessary? Jake Edmiston of the Financial Post investigates and discovers that the answer is more complicated than it seems. Know more about it here and take a look at this graph showing how supermarket profits have increased during the pandemic.

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With more couples choosing not to marry, it’s important to consider the financial implications of living in common law and to know your rights if you ever need to leave the relationship.

While it may seem less complicated than marriage, these relationships come with their own legal conundrums.

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Our content partner MoneyWise can help with tips and advice about how property works in common law relationships.

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Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional information from The Canadian Press, Thomson Reuters and Bloomberg.

Do you have an idea for a story, plot, embargoed report or suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.

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