Bank of Canada Report: Renters Face Greater Financial Strain Than Homeowners
The rapid rise in interest rates has sparked widespread concern, particularly among mortgage holders. However, a Bank of Canada report reveals that households without mortgages are exhibiting the most signs of financial distress.
Growing Disparity
Bank of Canada Governor, Tiff Macklem, shared these insights during his presentation to the Standing Committee on Finance. He explained that this trend is due not only to rising rents but also to increases in interest rates on consumer loans and auto loans, coupled with the rising cost of food.
Renters, who often have lower incomes than homeowners, are increasingly finding it difficult to manage everyday expenses, leading to an increase in defaults on credit cards and auto loans, returning to pre-pandemic levels.
Stability in Mortgage Loans
By contrast, half of the mortgage holders who have already renewed their loans at higher rates show a very low default rate (0.5%). However, Mr. Macklem warns that the default rate could increase as more renewals are expected in the coming years at potentially higher rates.
He highlights the adaptability of households which, despite high interest rates, have adjusted their consumption to continue meeting their obligations. This resilience contributes to the current financial stability, although long-term forecasts remain uncertain.
Forecasts and Future Risks
The report remains optimistic about households' ability to adapt, noting improvements in employment and wage increases. However, the specter of a rise in default rates remains, particularly with the potential for economic slowdown and rising unemployment that could exacerbate difficulties for households with or without mortgages.
Mr. Macklem cautions against too rapid a drop in interest rates, insisting on a gradual approach to avoid exacerbating tensions on the Canadian dollar and overall financial stability.