OTTAWA, Sept 16 (Askume) – Although Canada has cut interest rates three times since June, Canadian consumers still feel more pressure than those in the neighbouring United States, where the Federal Reserve has yet to cut borrowing costs.
The ongoing financial stress reflects uncertainty about Canada’s mortgage structure, rising rents and the heavy debt burden many households carry. All three have limited disposable income.
Analysts and economists say Canadians will feel the pinch next year and beyond as mortgage renewals surge and population growth accelerates, increasing rental pressure, slowing economic growth.
While Canada has made progress in lowering borrowing costs and became the first economic powerhouse this cycle to cut interest rates in June, the outlook is dim. It has cut interest rates twice since then, leaving the main policy rate at 4.25%.
The Federal Reserve is expected to cut interest rates for the first time next week, and the market is debating whether to cut interest rates by 25 basis points or 50 basis points first.
Inflation-adjusted per capita spending in Canada fell 2% from its peak in 2022 and fell 1.1% annually in the second quarter, indicating consumers are struggling to cope with the burden.
In comparison, inflation-adjusted spending in the United States rose 2.7% annually in July, which is generally considered in line with pre-pandemic trends.
This difference largely reflects differences in the structure of mortgages in Canada and the United States.
“What you’re seeing in the U.S. is the dominance of the 30-year fixed-rate mortgage,” said Randall Bartlett, senior director of Canadian economics at Desjardins. “For homes, it’s very predictable,” he added.
In comparison, most Canadian mortgages are either variable-rate or adjustable after four to five years. Homeowners who have low-rate loans up for renewal now are likely to see their payments increase even with the Bank of Canada’s current series of interest rate cuts.
Bank of Canada Governor Steve McCallum said at a news conference in London last week that consumers will have less spare money than their American counterparts because Canadians are spending more on paying down their mortgage debt.
Nearly C$400 billion ($294.55 billion) worth of mortgages are due to renew in 2025, more than two-thirds of which are on four- or five-year contracts. The 2025 figure represents more than 30% of the value of mortgages renewed this year.
“This is a wall of mortgage renewals,” Bartlett said, adding that it will put many Canadians under pressure in 2025 and 2026.
Debt levels rise
Two out of five Canadians who rent their homes are also feeling the pinch, said Vivek Deheja, an associate professor of economics at Carleton University.
Landlords, who are themselves burdened with high mortgages, are raising tenants’ rents, forcing tenants to take on more debt to meet other obligations, he said. This cycle is unlikely to end soon, he said.
On the demand side, population growth brought by immigrants has put pressure on Canadian rents, with rents rising 8.5% annually in July.
Analysts say Canada’s already high household debt levels made the situation worse when interest rates began to rise after the pandemic.
“Canada was very sensitive to interest rates when the pandemic hit,” said Carl Schmota, chief market strategist at global payments company CorpPay.
He said the key interest rate tightening cycle that began in early 2022 has had a disproportionate impact on Canadians.
As of March 31, total household debt exceeded Canada’s GDP, while the US figure was less than three-quarters of the economy’s size.
According to official data, Canadian households spent about 15% of their disposable income on debt servicing costs in the first quarter, while Americans paid about 10% of their income. They are now forced to save more to pay off their debt obligations.
Canada’s household savings rate reached 7.2% last quarter, the highest level in nine quarters, while the US household savings rate as of July was 2.9%, the lowest level since June 2022. Data shows that US consumers are spending heavily despite high interest rates.
(1 USD = 1.3580 Canadian Dollars)
