Canadians are facing the most expensive credit in almost a decade. Bank of Canada (BoC) numbers show households are seeing the effective borrowing rate creep higher. The rate, which impacts how much consumers can borrow, is now at the highest levels since the Great Recession.
Effective Borrowing Rate
The effective borrowing rate is one way to gauge how expensive credit is for households. It’s a weighted index of both consumer and mortgage rates, and uses both posted and discount rates. Analysts use systems like this to get an idea of how real world conditions impact borrowers. The posted 5 year fixed rate bank economists use is fine, but people with good credit almost never pay that rate. Today we’ll be looking at the pain actual consumers are feeling. Don’t worry, it’s not all that complicated once the numbers are crunched.
Canada’s Effective Borrowing Rate Reaches Highest Level Since 2009
Canadians are feeling the pressure of higher rates, which is reducing credit consumption. The effective borrowing rate reached 3.91% on October 26, an increase of 2.62% from the week before. Yeah, the WEEK before. Compared to the same week last year, consumers are looking at an increase of 14%. That’s right, almost a fifth of the reduction over the past year was last week.
Canadian Household Borrowing Rate
The Bank of Canada’s weekly effective borrowing rate for Canadian households. The number is a weighted average of interest rates on mortgage and consumer credit products.
Source: Bank of Canada, Better Dwelling.
Canadian households have seen their access to credit whittled away since last year. The current rate is up 30.33% compared to the bottom, which we hit in July 2016. The effective rate last hit this level in March 2009, almost a decade ago. Borrowers literally haven’t felt this level of rates since the Great Recession.
WTF Are You On About, And Why Do I Care?
Data points like this are abstract to the average consumer, so let’s work through an example. Today’s effective rate, if it were used for mortgages, means you would qualify for 1.2% less than last week. Compared to last year, a borrower would be looking at a 5.74% reduction on the maximum size of their mortgage. From the all-time low achieved in July 2016, it’s about 11.04% lower. Today’s buyers are looking at significantly less buying power than those over the past couple of years. Since the full impact of an interest rate hike takes about 6 to 12 months to be felt, the last hike will push the rate even higher (and the amount people can borrow even lower).
Borrowing rates influence the price of assets. Real investors, not negative cash flow speculators, should watch this number very closely. Expanding credit allows borrowers to absorb higher asset prices with greater ease. Do you want to guess what shrinking credit capacity does?
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Now for the same real estate agents that said home prices have no relation to income whatsoever to chime in and say the size of mortgage rates are not related to home prices.
I thought the industry resorted to saying prices are correlated with the number of Amazon headquarters they’ll open in your city? Bahahahhaa
About that Amazon HQ Toronto real estate agents were pumping…
https://www.nytimes.com/2018/11/05/technology/amazon-second-headquarters-split.html
I’ll save everyone the clickthrough, it’s not happening in happening in Toronto. Companies have to attract a work-life balance, and Toronto has a hard time attracting high level employees.
Real estate in Toronto costs as much as on Long Island, which is a part of a metro area that produces as much GDP as all of Canada.
Rates are rising faster than incomes, by a long shot. /thread
But incomes never really went up more than 1% a year in Ontario…due to the increase in precarious work. Wages don’t get bid up in boom times anymore because employees don’t have any bargaining power. The whole incomes vs rates discussion is no longer relevant.
Took just over a year after the last rate cut to bottom. Very interesting.
Guessing rate competition amongst lender during peak lending helped push them down.
Was seeing variable as low as 2.1%, which at near inflation, would have been stupid not to borrow at. Now that it’s climbing much faster though, I’m guessing unloading my condos earlier this year was probably a smart thing.
Rates will rise until the market chokes and we run out of buyers, then we’ll get some rate cuts when employment drops closer to natural levels. Probably buy the same assets at a 15 point discount in 3 years.
Which is technically a 22% loss for the holder based on a cumulative 2% annual inflation model… and then who knows how long trading sideways losing 2% / annum.
I love borrowing money at 2.1%
Thank you for the important differentiation between an investor and speculator. An investor understands they have to get out in order to make money. A speculator assumes that since prices go up, you just hang on to it for as long as possible and keep money. They don’t understand that you’ve made nothing until you sell.*
* if you can sell.
Just wait for the speculators to go on their lunch break at Tim Hortons, to complain about how none of this is relevant. It can only go up, up, up! 😂
The differences between an Investor, a Speculator and a Gambler are as follows:
Investment: Capital outlay to generate a “Cash-Flow”.
Speculation: Capital outlay to generate a “Capital Gain” (usually based on an aberration).
Gambling : Capital outlay to generate a “Capital Gain” (based on probabilities).
why not just say effective borrowing rate is highest in 10 years… great recession… ok…
and what are you implying? the “great recession” saw 10% drop in real estate price and then double/triple the price after.. are you saying we are gonna see a dip then astronomical growth?
can you write something other than picking one random index out of a jar of 200 and write couple paragraphs… it’s getting old
OK, I’ve seen you whine with every single comment you’ve made. Have you considered you are NOT the target audience? Do you lack the mental capacity to not read something you don’t like?
Most of the investment community actually pays money for an update on a single indicator, and a breakdown. I find it useful, but I’m not just some schmuck with all of my money in a condo, that’s looking for a circle jerk about turning a tiny amount of money into slightly less money.
whoa, someone needs a time out. release your sphincter and breathe lol
@Zz out of curiosity I’m just wondering whether you’re an agent or a high leverage speculator? As from all of your posts it’s quite obvious that you’re one of them.
Live your life ZZ, f*ck what BD is writing, Globe and Mail would be your kind of read. This shit is stressing you out!
Lock in your rate now and start reading something else, you’ll feel better.
Good Luck man!
Yeah, that random, outdated, irrelevant interest rate thing, what has that got to do with RE prices … why not focus on important metrics, like the cost of importing Italian sports car parts?
lol. I hear Lambo sales are down in Vancouver, that’s bullish right?
omg, say it aint so! 🙂
In Canada, household debt is at record levels at a time when the Foreign Direct Investment OUT has been higher than IN over the last 20 years which means Canadian companies are investing outside of Canada to get a better return on Capital and Labour.
Capital and Labour agents will not be supportive for households in their effort to repair balance sheets if real estate values fall below recent mortgage creations.
Long term chart of Canadian Household Debt, GDP, Foreign Direct Investment and Balance of Trade: http://www.chpc.biz/household-debt.html
Balance of trade is not very supportive either for production (sales/income). We have become entrenched consumers, not producers.