By Promit Mukherjee
OTTAWA (Reuters) – Despite three interest rate cuts since June, Canadian consumers still appear to be feeling more stressed than their neighbors in the U.S., where the Federal Reserve has yet to start any reductions in borrowing costs.
The persistent financial pressure reflects the vagaries of the Canadian mortgage structure, a surge in rents and a heavy debt load carried by many households. All three have crimped disposable incomes.
With more mortgage renewals coming up and high population growth to put more upward pressure on rents, analysts and economists say Canadians will feel stressed well into next year and after, keeping economic growth muted.
The outlook remains muted even though Canada got a headstart in lowering borrowing costs, becoming the first ecomomic power in June to cut rates in the current cycle. It has followed up with two more cuts, bringing the key policy rate to 4.25%.
The Federal Reserve is likely to cut its benchmark rate for the first time next week, with markets now debating whether it will start with a 25 or 50-basis-point reduction.
Canada’s inflation-adjusted per person expenditure has fallen by 2% since the peak of 2022 and 1.1% annually in the second quarter, showing that consumers are reeling under the burden.
By comparison, inflation-adjusted spending in the U.S. grew 2.7% annually in July and is generally considered to be in line with the pre-pandemic trend.
This divergence mainly reflects the differing structure of Canadian and U.S. mortgages.
“What you’re seeing in the U.S. is a preponderance of 30-year fixed-rate mortgages,” said Randall Bartlett, senior director of Canadian economics at Desjardins. “It’s very predictable for households,” he said.
By contrast, most Canadian mortgages are either variable rate, or adjustable after four or five years. For homeowners with low-interest loans now coming up for renewal, they can expect their payments to jump, even with the Bank of Canada’s current series of cuts.
Bank of Canada Governor Tiff Macklem said during a press conference in London last week that consumers had less extra money to spend compared with their American counterparts because Canadians were spending more to service their mortgage.
About C$400 billion ($294.55 billion) worth of mortgages are set to renew in 2025, out of which more than two-thirds are four- or five-year contracts. The 2025 figure is more than 30% of the value of mortgages being renewed this year.
“It’s a wall of mortgage renewals coming up,” Bartlett said, and added that this would keep many Canadians under stress way into 2025 and 2026.
ELEVATED DEBT LEVELS
Vivek Dehejia, an associate professor of economics at Carleton University, said renters, a category that comprises two out of every five Canadians, were also feeling the strain.
Landlords, themselves burdened with high mortgage payments, are raising rents for their tenants, who in turn are taking on more debt to meet other obligations, he said. That cycle is not likely to ease any time soon, he said.
On the demand side, an immigrant-led rise in population has put upward pressure on Canadian rents, which rose 8.5% year on year in July.
Canada’s household debt levels were already high when interest rates started rising after the pandemic and that has made conditions worse, analysts said.
“Canada entered the pandemic with a very elevated level of vulnerability to interest rates,” said Karl Schamotta, chief market strategist at Corpay, an global payments firm.
He said the big interest rate tightening cycle, which began in early 2022, had a disproportionate impact on Canadians.
The total household debt exceeds the size of Canada’s GDP, while in the U.S. that figure was less than three-quarters of the size of the economy as of March 31.
In the first quarter, Canadian households spent around 15% of their disposable income to meet debt-servicing costs, while Americans paid about 10% of their income, according to official data. Now they are forced to save more to meet debt obligations.
Canada’s household savings rate touched 7.2% in the last quarter, its highest in nine quarters, while in the U.S. it was at 2.9% as of July, the lowest since June 2022. That number indicates U.S. consumers were still spending much more despite high rates.
($1 = 1.3580 Canadian dollars)
