credit and debt
03. credit & debt Mortgage debt in Canada is soaring—which is exactly as you might expect when the cost of borrowing remains near historical lows.
MORTGAGING THE FUTURE?
The whole point of lowering interest rates, if you’re a central bank and you can do such a thing, is to both disincentivize saving and encourage borrowing and spending. You do this when inflation is “too” low and/or when the rate of economic growth is sluggish. (Conversely, central banks raise rates when, primarily, they want to cool off inflation. Like we’re seeing now.) This typically leads to rising prices, growing production and employment, and falling unemployment rates. It can also pump asset values. Part, but not all, of the reason for the rapidly- rising house prices we’ve seen over the past two years has been due to historically-low interest rates, which have allowed households to afford more expensive homes for a given income and savings/wealth combo. This, in turn, has led to a rise in the rate of mortgage debt accumulation.
Specifically, Canadians added $196 billion to their total debt stack over the past four quarters ending in Q4 2021, which was up by 100% compared to the $98 billion growth of the previous four quarters (ending Q4 2020). Mortgage debt growth accounted for almost all of the total debt increase over the past year (96% of it, to be precise), with consumer credit and non-mortgage debt growing only marginally. As the next section explains, this is not as worrying as it first appears, as interest rates remain extremely low. That said, households will have to tighten their collective belts in the months and years ahead—but likely only a notch or two.
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