Assessing Household Debt’s Sensitivity to Higher Interest Rates

In Focus

July 19, 2017

The Bank of Canada is on the move, rates are expected to rise again before the end of the year, and if everything goes according to plan, the Bank might move by an additional 50 basis points in 2018. It’s hardly a secret that the Canadian economy in general, and the real estate market in particular, are more sensitive to higher rates now than in any other time in recent history. But how sensitive?

Headline numbers clearly don’t tell the whole story. To get a full understanding of the impact of higher rates we also have to visit the margins of the debt market spectrum. We conclude that those margins are not wide enough to generate a wave of defaults following the Bank’s expected tightening. Consumer spending is likely to soften due to increased debt payments, while the pace of growth in mortgage outstanding is expected to cool notably as the impact of higher rates is amplified by the expected changes to qualifying rate criteria on the non-insured segment of the market.

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