Canada Could have Avoided Rising Interest Rates, Claims New Report
Had longer mortgage terms held sway and allure, the shockwaves of payments could have been significantly more bearable.
In the global landscape of soaring interest rates, Canada finds itself among the hardest-hit nations, a predicament underscored by a recent revelation: it didn’t need to be this way, as reported by the Financial Post.
According to a recent report from the Fédération des caisses Desjardins du Québec, since the Bank of Canada initiated its rate hike trajectory back in 2022, Canadian households have grappled with a debt-servicing ratio scaling unprecedented heights compared to their advanced counterparts. However, the report posits a tantalizing conjecture: had longer mortgage terms held sway and allure, the shockwaves of payments could have been significantly more bearable.
Presently, Canada’s mortgage domain tilts heavily towards fixed-rate mortgages, predominantly spanning up to five years, relegating longer terms to a marginal share of the market.
In stark contrast, our neighbors down south seized the opportunity during the pandemic-induced turbulence to secure historically low rates for 30-year terms. Canadian mortgagees, bound by shorter durations, now find themselves at the mercy of steep renewals or impending ones over the next biennium, entailing substantial escalations in rates.
Desjardins’ chief economist Jimmy Jean and macro strategist Tiago Figueiredo underscored the poignant irony of this conundrum, emphasizing the precarious position of Canadian households amidst global indebtedness peaks. They warned that as inflation looms and the Bank of Canada is pressured into further rate hikes, the financial fissures could deepen, triggering a cascade of forced sales and defaults.
The disparity in mortgage frameworks between Canada and the U.S. has been identified as a catalyst for the latter’s economic outperformance. Canadians, ensnared in shorter terms, have tightened their belts or embraced additional debt burdens, while their American counterparts have continued to spend with abandon.
The report unveils similar scenarios in other nations like Australia and the United Kingdom, albeit with features that either cushion or sidestep payment shocks. For instance, the U.K.’s flexible mortgage amortizations spanning up to 40 years spread payments thinly over time, albeit at the expense of heightened interest payouts.
Desjardins highlights the dominance of variable-rate mortgages in Australia, constituting approximately 75% of active contracts, ensuring real-time adjustments that mitigate delinquencies witnessed elsewhere.
In Canada, mortgage delinquencies have spiraled upwards, particularly in Ontario and British Columbia, surpassing pre-pandemic thresholds.
Desjardins contends that a shift towards 10-year mortgage terms would have mitigated these shocks, underscoring the necessity for innovation in Canada’s mortgage landscape. They advocate for legislative reforms to enable a robust private-label residential mortgage-backed securities market akin to the U.S., facilitating longer-term underwriting.
In conclusion, the report underscores the pressing need to revitalize Canada’s mortgage market, emphasizing that the time for innovation is now, especially given the precarious economic climate precipitated by rising interest rates and exacerbated by the pandemic’s aftermath.