Rising interest rates will hit Canadian household spending through 2023, Bank of Canada says

Canadian household spending is expected to decline significantly over the next few quarters as the sustained pace of higher interest rates affects purchases of homes and other big-ticket items.

The Bank of Canada said in its latest quarterly monetary policy report that it expects borrowing costs for homes to rise sharply since the central bank began raising interest rates in March. The central bank said households renewing an existing mortgage face a bigger increase than they have seen in the past 30 years.

“For example, a homeowner who signed a five-year fixed rate mortgage in October 2017 would now face a mortgage rate 1.5 to 2 percentage points higher at renewal,” the Bank of Canada said.

Residential investment such as new construction; Property transfer costs and renovations are seen as the factors most affected by the central bank’s decision to raise interest rates to 3.75% over the past year.

This type of residential investment is expected to continue to weaken in the first half of 2023, although to a lesser degree than in 2022. Home prices – which have fallen less than 10% since March – are also expected to to lower. decline further, especially in markets that have seen strong increases during the pandemic.

Housing costs, which include residential investment, as well as food prices, contribute about 40% to Canada’s inflation rate and generally account for a larger share of expenses for low-income Canadians. Housing price inflation has been nearly 7% this year and remains high due to soaring mortgage costs and rental prices.

The Bank of Canada also pointed out that spending on big-ticket items such as automobiles, furniture and appliances is already showing signs of slowing, while demand for services such as travel, hotels, restaurant meals and communication services will also be affected.

Household spending is expected to rebound in the second half of next year and throughout 2024, the Bank of Canada said.

New home purchases will be boosted by strong immigration, while population growth and rising disposable income will help support rising demand as monetary policy is expected to ease by the end of 2023.