The Economy Needs You To Loosen Your Purse Strings …Or Else.

Do you know what the largest driver of Canada’s economy is?

Do you think it’s the auto industry, fishing industry or our Oil & Gas sector?  What about all three of these areas combined?

NOPE.  Guess again.

It’s consumer spending!!  

Consumer spending accounts for over 60% of Canada’s Gross Domestic Product (GDP)!

[Fundamental Note: GDP is the total value of everything produced by all people and companies in a National economy.]  

Canadian’s have been racking up record levels of debt over the past decade.  And Canadian’s primary indebtedness is from Mortgages (or purchasing Real Estate).  About 67% of Canadians are on the home-ownership ladder.  

As your Calgary Mortgage Broker, I want to let you know why this matters to you …

Here’s why consumer spending matters to you:

First, higher interest rates put the question to consumers ….keep spending or pay down existing debt?  If the narrative in Canada becomes “pay down debt” then less disposable income is turning our economy.  

If our economy slows, which might be led by consumers spending less, our Central Bankers might pause their rate hike agenda, or lower rates again (I don’t think this would not be a good thing overall). 

Have you noticed a change in your spending habits since rates began their upward trajectory in July 2017?  Reply to me. 

Let’s explore the following:

How Big Is Canada’s Debt Problem?

On average Canada’s debt is 170% of household disposable income.  This means Canadians owe $1.70 for every $1.00 of disposable income. 

This is an AVERAGE.  This includes people with no debt and people with A LOT of debt. 

About 8% of Canadian families owe 350% more debt than their disposable income!  This group of Canadians pose the biggest risk to our economy and financial markets. 

If 67% of Canadians are home owners, then 8% of this group would represent approximately 1.97M people.   

And this is the group our Central Bankers are watching closely.  They represent a percentage of the population at serious risk in a rising interest rate environment.   

A 0.25% interest rate hike today has a similar effect in our economy as 0.50% rate hike in the past.  

Interest rate hikes can take up to two-years to work their way through the financial system.  For example, a family might have purchased a home in 2016, before the first stress test was introduced.

Their Mortgage would likely renew between 2019 – 2021.  Only then would their Mortgage be exposed to higher market interest rates (unless they have a variable/adjustable rate Mortgage).  

From what I am reading and hearing in the media, the Bank of Canada is happy with the OVERALL trajectory of Mortgage growth and debt-to-disposable income in Canada.  

So far, this vulnerable sliver of indebted Canadians have not materialized into any material hints of an avalanche coming.  

Again, this is something to be watching for from our Central Bankers.

What about Calgary?

Although it might feel like Calgaryians are being kicked while down, in terms of rate hikes relative to our local economy, our Central Bankers are looking at National data.

Here’s what we can prepare for …

The further we are away from a “neutral interest rate” which is neither stimulative or restrictive, the more risk there is to our economy.

Today our Bank rate is at 1.75%.  The estimated neutral Bank interest rate in Canada is 2.50% – 3.50%.  Without any major divergence of incoming economic data, plan for continued upward pressure on interest rates. 

I am keeping an eye on consumer spending data as it comes in and reporting to you. 

Here’s How To Protect Yourself:

1. Understand your Mortgage qualifying.  In detail.
2. Understand the inputs into arriving at your home affordability.  Are you using conservative inputs or stretching things out?
3. Think about future interest rates, at the end of your proposed Mortgage term, and work backwards to calculate your home affordability in the future.
4. Consider income and debt variables over the term of your Mortgage. 

My clients will recognize these acronyms:

TDS.  GDS.  BOSS.  

Since 2011 I’ve gone out-of-my-way to prepare my clients for increasing interest rates. 

The Department of Finance finally caught up to me by introducing a stress-test.  HA!

If you’re on the property ladder now, continue to plan for upward pressure on interest rates. 

If you’re considering the purchase of a home, be sure to ask me about TDS, GDS, and BOSS.  

Talk soon,

Chad Moore

P.S

New Year’s resolutions are on my radar now.  The last couple of years I’ve started early and gained momentum heading into January. 

Has this entered you mind yet?

Thanks for reading!