Canada

Canadian Borrowing Rates Hit The Highest Level Since 2009… Then Collapse

Borrowing rates are sliding before the traditional busy season for Canadian real estate. Bank of Canada (BoC) numbers show the effective borrowing rate peaked in early March. Shortly after printing the highest number since the Great Recession, the rate dropped. The minor drop made headlines, but only really impacts people shopping in that window. The reality is borrowing rates made the second largest annual increase in over half a decade.

Effective Borrowing Rate

The effective rate is the typical cost a household would pay for debt servicing. The number uses mortgage and consumer rates, and includes both discounted and posted. The data comes from actual borrowers, and is from lender and consumer reports. In short, it’s an index of the rate people actually pay. This is opposed to using posted rates, which only people with less than great credit pay.

Borrowing Rates Are Over 9% Higher This Year

The effective borrowing rate reached a multi-year high, before dropping. The effective rate reached 3.97% in the week ending March 29, down 0.25% from the week before. Even with the weekly drop, the rate is still 9.67% higher than the same week last year. A bit of a mixed indication on where they’re heading – lower week-over-week, but still higher than last year.

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.

The index did breach a level we haven’t seen since the Great Recession. On March 8, the effective rate hit 4.02%, the highest level since the same week in 2009. Over the past few weeks, we’ve seen it fall 1.24% since reaching that peak. This add an estimated 0.5% to the maximum mortgage a household can borrow.

The Second Largest Increase In 8 Years

The real estate industry probably only heard rates fell, but households still face less buying power. The effective rate is still 9.67% higher than last year, shaving off an estimated 3.5% from the maximum mortgage. It’s the second highest increase Canadians have seen in over half a decade. Zooming out a little, we can still see the overall impact is going to be less leverage.

Canadian Household Borrowing Rate Change

The 12 month percent change for the effective interest rate households faced on Mar 29.

Source: Bank of Canada, Better Dwelling.

Worth a mention is the effective borrowing rate typically falls into the spring. Last year was one of the few exceptions, but rates historically rise in February or early March. They then make a slight decline into the spring, as volume picks up. The slide may be less of a sign of credit weakness, and more of an accommodation for seasonal volume. We won’t know if this is seasonal or an attempt at stimulus until well into spring.

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13 Comments

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  • Probably Fine 6 months ago

    Surprised BD didn’t explain why falling rates aren’t good. They’re a sign that current credit demand needs stimulus. Since interest rates weren’t cut for the slide, it means banks are willing to kill their own margin to provide this stimulus. Interesting issue, and I don’t think we’ve seen anything like this in a while.

    • Ethan Wu 6 months ago

      Too early to tell, but I think this is the falling knife game. Rates drop until people pick up the demand, which can’t physically be as high as it’s been in the past few years, because all of those condos going up (more than anywhere else in the world) are already pre-sold.

  • Fraudcouver 6 months ago

    You’re right, all agents and the news have been talking about is that mortgage rates got a cut. Makes sense it would be cut going into spring, when mortgage volume is rising and competition is higher. Real estate agents only use supply and demand as an argument when it benefits them apparently.

  • Wei 6 months ago

    A lot of takeaways here IMO, but the most important is the economy isn’t strong enough to hold a 4 handle on borrowing rates. The Great Recession required cutting more than 4 points to prop up prices.

  • RE EXPERT EXTRAORDINAIRE 6 months ago

    Thanks for the numbers BD.

  • CanadaSucks 6 months ago

    BOC won’t cut rate. Price of gasoline and diesel is raising. More inflation is coming for Canada. At best he will keep the rate unchanged. At worst he will raise rate to kill inflation. He can only lower rate if US lower rate. People are dreaming about a revival of the housing market. Watch inflation coming big time in the next couple of month because of rising gasoline and diesel.

    • Trader Jim 6 months ago

      Having a hard time seeing a rate cut as well, but something’s gotta give for stimulus to curb the next recession (or get us out), otherwise it can turn into a depression quickly. The cut we got in 2015 was on global strength, which is why it turned everything into a bubble. In hindsight, they’re probably pretty sorry they didn’t go through a minor recession then.

      • Ryan Nara 6 months ago

        I am thinking more along the lines of lowering the mortgage stress test rate to around 5 from 5.4 ish. This will qualify more people for houses without the collateral damage of gas prices moving up.

        Interest rate cut is a broad sword that affects the economy as a whole whereas here they have to stimulate the housing market without affecting the rest of the economy negatively.

    • Game of Bones 6 months ago

      Canada is still 50 basis points behind the US on the overnight (1.75%vs 2.25%). The most that Canada could do is keep as is, but would not be surprised if the BoC slowly caught up to the US over the next 12-18 months.
      My bold prediction from my research, and after the Fed said it wouldn’t raise rates for 2019, is that when the next recession comes, Fall 2020, the only way to avoid the Canadian version of The Great Recession is to go negative interest rates. North America is addicted to such low rates that like a junkie, will go through withdrawals if it cannot get it’s fix. Negative rates will be the methadone. The next 20-25 years will see little growth because the Canadian/US future economy is mortgaged to pay off it’s debts. Negative rates won’t affect the common person’s bank account, credit card, or mortgage, just the banks so there will be no hoarding of money. We also live in a cashless society nowadays. Majority of people will not be able to service their debts if interest rates rised to the formerly projected 3% by 2020. Debts always get paid, either by the borrower or the lender. Banks may take a hit, but will get paid.

      I say this because right after the Fed said it was staying pat, interest rate wise, the San Francisco Federal Reserve put out a report saying had negative rates been implented in 2008/9, that the economy would have recovered faster and better rather than bringing it to near zero. There has been no problem selling trillions and trillions of negative interest bonds. Japan pioneered negative rates, Europe refined it, North America will master it, and the sky didn’t fall when Japan and other European countries implemented it. Just like fashion, it goes from Asia to Europe to North America.

      https://www.frbsf.org/economic-research/publications/economic-letter/2019/february/how-much-could-negative-rates-have-helped-recovery/

      https://www.bloomberg.com/news/articles/2019-02-05/land-of-cheap-money-marks-20-years-since-zero-interest-rates

      https://www.marketwatch.com/story/amount-of-global-debt-yielding-less-than-0-approaching-10-trillion-2019-03-22

  • iain palmer 6 months ago

    What a load of rubbish, rates are controlled by 1) fixed rates of interest fluctuate with the bond market.
    2) variable rates are controlled by the BoC. Absolutely nothing to do with seasons…

  • Bluetheimpala 6 months ago

    The latest activity around real estate feels like an attempt to stabilize the market, or more so give the impression of stability, in the face of reality. Borrowing rates increasing and then dropping is similar to the rate cut that precedes a recession; if fundamentals are strong and there is just too much heat, cooling is a good thing. Seems like we’re doing everything we can to convince each other everything is ok and that massive debt loads which have wiped out any low rate benefits are the new normal.
    We’re experiencing this in other markets, specifically equities and bonds. Trump pump, Fed 180 on MBS and UST wind down, doveish fed rate talk, murky macro data, sudden revisions to macro data, conflicting CH data, CH and EU QE, EU and CH loosening of banking reserves…I dunno, weird. Tock. BD4L.

    • John 6 months ago

      I wholeheartedly agree with your sentiment. ‘Weird.’

      I am so lost and confused on the state of the market right now and I’m terrified I will miss out… That government intervention is going to further prop up the market… That interest rate cuts will prop up the market…

      Nothing makes sense. GDP is down, yield-curve inverted, job numbers are up, real estate is up, exports are up. Like… wtf. Both hands are clapping, but not with each other.

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