Under the Pressure of Rising Interest Rates, Canadian Homeowners Cut Back on Expenditures

As mortgage rates soar, Canadian homeowners are tightening their belts. A recent study by TD Economics reveals how climbing interest rates are weighing heavily on Canadians with mortgages.

Since early 2022, the Bank of Canada's overnight rate has surged from a mere 0.25% to an imposing 5%. This hike has pushed mortgage rates up by a staggering 300 basis points, intensifying the financial burden on homeowners. As a result, mortgage debt now represents a substantial 74% of Canada's total household debt, which stands at $2.9 trillion. The percentage of income Canadians devote to debt servicing has risen from 13.6% in 2020 to 15.4%, a significant jump in financial commitment.

TD Economics delved into internal mortgage and credit card data to better understand how Canadian homeowners are adapting to these higher rates. Their findings are telling: high household debt is a critical weak spot in the Canadian economy. With many homeowners refinancing their mortgages at these higher rates, they're left with less disposable income, impacting overall consumer spending.

The data points to a clear trend: those with mortgages are tightening their budgets. Compared to individuals without mortgages, homeowners have reduced their spending by about 1%, translating to a $6 billion decrease in nationwide spending. Had mortgage rates remained stable, TD Economics suggests that real consumer spending growth would have been around 1.9% year-over-year in the third quarter. Instead, it was recorded at just 1.5%.

Further insights emerged when examining homeowners based on their mortgage renewal years. Those who renewed in 2023 are in a particularly tight spot compared to those who locked in lower rates in 2020. Homeowners who renewed in 2021 reduced their spending by 0.9% year-over-year, and those renewing in 2022 cut back by 1.4%. But the most significant change comes from those who renewed in 2023, with a 2.4% reduction in spending. In contrast, Canadians without mortgages have actually increased their spending by 1%.

Interestingly, homeowners up for renewal in 2024 have only cut their spending by 0.5% annually. This cautious approach likely stems from the anticipation of a substantial increase in their mortgage payments.

The Bank of Canada estimates that by the end of 2023, nearly half of all mortgages will have been renewed at higher rates, and by the end of 2024, this will increase to 65%. The expectation is that the 2024 cohort will further reduce their spending, exerting more pressure on consumer spending overall.

While the current situation doesn't seem to be pushing the economy towards a recession, it's clear that high interest rates are placing a growing strain on Canadian consumers, especially those with mortgages. As we move forward, this trend is likely to continue, impacting both the real estate market and the broader economy.