TD – Canadians ready for higher rates in 2013?

Francis Fong, an economist with Toronto-Dominion Bank, says Canadians look “well-positioned” to absorb an interest-rate increase of around 2 percentage points, “there is a substantial minority that cannot.”

Specifically, Mr. Fong points to analysis from the Bank of Canada itself, which warns that 7.5 per cent of Canadian households could be in some financial trouble once borrowing costs “normalize.” He also points to a projection by the Canadian Association of Accredited Mortgage Professionals that a benchmark rate of 3 per cent would put 21 per cent of all mortgage holders in hot water.

TD predicts the first rate hike will come before the end of 2012, sees Mr. Carney moving very gradually to 2 per cent – by the end of 2013. The central banker will be able to move more aggressively once the European crisis seems more stable again, and once the U.S. economy is stronger and the Federal Reserve is closer to hiking, too. So, Mr. Fong warns, barring another “major shock” to the global economy, Mr. Carney’s rate (which directly influences variable-rate mortgages and other floating loans) will rise by at least 2 percentage points before 2015.

Mr. Fong’s main point is that while higher rates are hardly a boon for consumer spending, rates will go up so slowly that there “will likely be enough lead time” for many households to “adjust their spending habits” to account for higher payments.

Moreover, he points to signs that Canadians are already accumulating debt at a slower rate, as does Benjamin Tal of CIBC World Markets in a separate report. Even in an environment of historically low interest rates, Mr. Tal says, overall household credit is rising at the slowest pace since 2002.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” he argues, suggesting Mr. Carney’s warnings are being heeded after all.

TD’s Mr. Fong notes that annual mortgage credit growth, while down from its pre-recession peak, has held steady at an almost 8-per-cent pace for three years. This suggests borrowers are using their credit cards and lines of credit less, but taking out mortgages at roughly the same clip.

And Mr. Tal notes in his report that the real-estate market is “overshooting,” even as signals suggest – in most markets, anyway – that activity is slowing down.

Which brings us back to overbuilding in Toronto and Vancouver. The same day that CMHC published its eye-popping housing starts numbers, the Crown corporation said in its annual report that it sees no “clear evidence” of a bubble. Mr. Carney, meanwhile, will probably never utter the B-word, but has been hinting for several months that he sees at least the makings of one in some cities.

This below is in his semi-annual assessment of the financial system, from December: “Certain areas of the national housing market may be more vulnerable to price declines,” he said, adding, “the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of correction in this market.”

Over and over again since then, Mr. Carney has said authorities are watching closely, and will act to cool the market if necessary, while stressing that interest-rate hikes are too blunt an instrument to deal with this issue, other than in “exceptional circumstances.” With Greece and Spain roiling global markets again, and lukewarm economic news south of the border, it’s harder to imagine Mr. Carney raising rates this year than it was a few weeks ago. Still, the excess supply of condos in Canada’s biggest cities suggests we may have reached “exceptional circumstances.”

Mr. Flaherty warned recently that condo developers seem willing to build new units until sales dry up. This could lead to a crash, and the last buyers in could get burned, he warned in a meeting with The Globe and Mail’s editorial board last month.

Source: CTV News

 

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