At first glance: some bad news for Canadian homeowners.
With predicted interest rate rises on the way from The Bank of Canada, mortgage costs are set to rise.
But as the majority of Canadian mortgage-holders are on fixed mortgages, such as five-year terms, the effect of higher interest rates will only gradually filter through to them.
The Canadian economy remains in rude health. According to research from Scotiabank growth is expected to hit 3.1% during 2017, more than double most estimates of the Canadian economy’s underlying potential this year, before slowing to 2.0% in 2018 and 1.5% in 2019.
Scotia expects momentum to continue through the second half of 2017 to sustain a forecast of 3.1% real GDP growth for the whole of 2017—up substantially from the 2.0% the bank estimated at the beginning of the year.
Although the sources of Canadian growth are broadening, they still remain heavily concentrated in consumption, which is unlikely to be fully sustainable as interest rates rise.
Looking ahead, Scotiabank Economics projects that potential growth will average 1.7% in 2017–19; this is at the upper bound of the Bank’s projections.
Consumers remain the biggest drivers of Canadian economic activity with consumer confidence is at its highest level in a decade and major purchase plans remain elevated.
Consumers are unlikely to be able to maintain their recent spending momentum. In particular, motor vehicle sales are set to move lower during 2018–19 after five consecutive record-breaking years that have driven per household purchases to record highs.
Rising interest rates also could squeeze household budgets and divert some discretionary spending. A 100 bps increase in the effective interest rate, all else equal, would lift the aggregate household debt-service to personal disposable income (PDI) ratio from its current level of 14.2% to just under 16%.