The central question in GTA real estate this quarter has been: How much of a bite will rising mortgage rates take out of demand?
Home owners have been used to historically low rates for such a long time, the fear has been that even a moderate uptick in mortgage rates would have a significant financial — and psychological — impact.
But a new report from CIBC Economics contends that there is still significant resilience among prospective buyers. In somewhat of a backhanded bit of optimism, the group describes rising rates as “hardly fatal” to the market.
“A generation of Canadians who have never experienced high borrowing costs is now being tested,” reads the report. “The claim that even now rates are still notably low relative to previous cycles is correct but irrelevant. The entire pool of household debt was taken out in a low interest rate environment. Add to the mix an inflation rate not seen in decades and there is a legitimate reason to be concerned about the ability of the consumer to sustain the economy.
“A closer look, however, suggests that despite the above, the expected slowing in consumer spending will feel more like a gearing down rather than slamming on the brakes. From a macro perspective, households’ fundamentals are now generally stronger than seen at the eve of previous hiking cycles and the structure of household debt will shield many borrowers from the full sting of higher rates in the coming year.”
The report notes that even though three quarters of household debt across Canada is in the form of mortgages, most of that is in some form of fixed payments. Even for variable rates, seventy percent of variable rate debt is on a fixed payment schedule.
For home owners with variable rate mortgages who are paying an adjustable rate,“the impact of higher rates is full and immediate,” CIBC admits, while noting that out of an overall national mortgage debt total of $2.7 trillion, only a quarter of mortgage holders are likely to experience “triggered” interest rates payments this year.
High rates of savings are also keeping the market buoyant, according to CIBC:
“People in higher income groups may not have benefited as much from wage increases, but they have something else to help cushion the blow of rising rates and inflation: the large amount of excess savings they accumulated over the pandemic. The inability of Canadians to spend as much as they might have wanted over the past two and half years, combined with high disposable income, led to a large increase in the savings rate and a buildup of savings.
“Even today, the savings rate remains well above recent historical averages, and excess savings total well over $300 billion. In fact, excess savings are still growing. Were consumers to use just 10% of those excess savings, it could lift consumption by almost 2.5%. While we expect higher interest rates to work to increase the motivation to save, unlike other cycles, this will be offset by the availability of that pool of savings.”
CIBC Economics is a research arm of the Canadian Imperial Bank of Commerce. The bank was created in 1961 with the largest merger of two chartered banks in Canadian history: The Canadian Bank of Commerce and the Imperial Bank of Canada.
