Mortgage turnover is threatening the economy, according to a former deputy governor of the Bank of Canada, who says interest rates are too high to justify current housing prices.
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“The danger to the economy is that many people have taken out five-year mortgages at interest rates as low as 1.5% during COVID. If they have to renew, their mortgage payments will jump because current interest rates are around 6.7%,” says Paul Beaudry, former deputy governor of the Bank of Canada.
Paul Beaudry, former economist, deputy governor of the Bank of Canada. Courtesy of the Bank of Canada. With kind approval
Over the past four years and on 36 occasions, Mr. Beaudry, along with the five other members of his committee, decided whether the Bank of Canada’s interest rate should rise, fall or remain unchanged. A difficult decision that every time impacts millions of people who have mortgages and other debts. And what he sees in the future is not reassuring.
“Almost everyone in Canada has a mortgage with a term of up to five years. So from 2025 to 2026, basically everyone will renew. If long-term interest rates remain at current levels, it will affect everyone,” he says.
Among mortgage holders in the country, so far only those with a variable interest rate and a variable payment (which increases with every increase in the Bank of Canada’s base rate) have been affected, he explains. However, this group only represents about 8% of mortgage borrowers.
“But it will continue to grow and affect more people year on year, because even those with fixed rates will have to renew soon,” he said.
Real estate prices must fall
If long-term interest rates remain this high, property prices are bound to fall, adds the professor in the Department of Economics at UBC, University of British Columbia.
“I tell people: prepare for the risk. If bond interest rates remain as high as they are now, this will lead to an adjustment in property prices. Maybe not a market crash, but be prepared for an adjustment,” he says.
The logic is this: When it comes time to make a long-term investment (five or ten years), people consider different decisions: for example, buying stocks or bonds, or buying a house. However, with bond interest rates currently hovering around 5%, it is becoming more and more profitable to invest your money somewhere other than a house and rent it instead.
“If you are wondering whether you want to buy a house, you should look at interest rates for five years and even up to 20 years as it is a long-term investment. If real estate prices continue to be very high and interest rates remain high, buying a house is not worth it. If I want to make an investment, I put my money somewhere else, for example in bonds or the stock market, and rent instead of owning,” he explains.
Outside the control of the bank
The Bank of Canada does not control interest rates on long-term bonds, he points out. Rather, it is global factors such as China’s appetite for Western assets or global demand for savings that are driving interest rates up or down.
“I don’t have a crystal ball to know whether long-term interest rates will continue to rise or fall, that’s the $10 million question. However, many forces expect them to remain high. “At this point there would be a significant adjustment in property prices,” he emphasizes.
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