Michael Campbell on Interest Rates
The following is an excerpt from the VERICO Economic Report written by Michael Campbell
The drastic change in the Bank of Canada’s stance regarding future increases in interest rates since October is a clear indication that the Bank and the Finance Department are surprised by the impact of rising rates on the real estate market and the overall economy. Gone is the October talk of three to four more rate hikes by the end of 2019 to today’s mantra of “wait and see.”
I still shake my head at the thought that they were surprised that an economy that had been built on debt and record low interest rates, especially in the real estate market, would react negatively to higher rates. Despite the fact that surveys and polls had relentlessly delivered the message that higher rates would cause consumers to cut back.
The average Canadian has nearly $23,000 in non mortgage consumer debt. It shouldn’t have been a surprised that by July, 2018, after four quarter point increases a third of Canadians were worried about paying the bills and bankruptcy. Environ Analytics calculated that for the average person living in Calgary the five rate increases since July, 2017 would translate into $3,641 in higher interest costs. In Halifax, an extra $2,246, Winnipeg and Montreal $2,100 more and in Vancouver, a whopping $3,943 in additional interest payments.
You don’t need an economics degree to figure out that taking an extra $2,000 to $4,000 out of people’s pockets will impact their spending. The increase in interest rates cut Canadians average discretionary income by 5% along with a 5% drop in their net worth because of the fall in homes prices. Simply put, people feel poorer and they’re paying significantly more in interest expenses – and that’s never a recipe for consumer confidence.