Canadians are buying into the narrative that higher mortgage rates will wreck half of households. A survey making the rounds saying exactly that doesn’t help, but the narrative existed before the survey. Fortunately, this isn’t true. How can we be sure? Well, let’s start with less than a third of households have a mortgage.
Less Than A Third of Canadians Have A Mortgage
Half of Canadians don’t have a mortgage, so more than half feeling the pinch from higher rates is unlikely. Equifax data shows 29.63% of Canadians in Q3 2021 have mortgages, and that share is the highest in a decade. If less than a third have mortgages, more than half of households can’t be impacted by higher rates.
A phantom limb is when someone reports they can feel pain in a missing limb. Maybe some homeowners have phantom mortgages? After paying it off, they still live in fear of mortgage rates rising? Either that or surveys are subject to routine sampling bias.
Share of Canadian Households With Mortgage Debt
The percentage of households with outstanding mortgage debt across Canada.
Source: Equifax; CMHC; Better Dwelling.
For those that missed the class, sampling bias is a bias where a sample skews towards a demographic. The smaller the survey, the higher the probability of an imperfect sample. All surveys have a sampling bias, and it doesn’t mean the results are wrong or misleading. However, it needs to be balanced with the hard data you have to yield insights. The real takeaway is, a lot of mortgage holders self-report higher mortgage rates.
That brings up a second issue — self-reporting negative impact scenarios. People tend to view themselves in the scenario that suits them best emotionally. Have you ever heard someone brag about being rich because of their home’s soaring value? Then say the rich need to pay more in taxes? They see themselves as rich when it suits them, but not when it doesn’t.
Similarly, people might say they’re worried about higher rates if they don’t want them to rise. Then they might boast about how cheap the rates are, and act completely differently. That might be what’s happening here.
Canadian Home Buyers Are Increasing Exposure To Rates
Traders often say it’s not what you know, it’s what you see. If you look, you’ll see homebuyers are increasing rate-risk exposure. The share of variable-rate uninsured mortgage debt reached 58% in October 2021. It’s about double the share seen a year before, which had been fairly consistent for the prior decade. Borrowers aren’t showing a fear of rising rates impacting their finances. They’re actively embracing the risk as a part of their financial planning.
The Vast Majority of Mortgages Issued Have Been Stress Tested
Canada’s bank regulator has prepared households for higher rates with the stress test. Banks in the country test a household’s ability to pay a mortgage 2 points higher. The country’s banks do the vast majority of mortgage originations. Some credit unions have voluntarily adopted similar tests. Non-bank lenders also report users with higher credit scores, that rarely max out leverage. We’ve prepared borrowers for higher rates for nearly half a decade. Much higher than we’re currently discussing.
Further, interest rates have only been down for two years. Less than a fifth of mortgage borrowers have been able to take advantage of falling rates. Even half of mortgage borrowers harmed by higher rates is a laughable narrative. Four-fifths of mortgage holders in 2019 needed a recession to manage their finances? Probably not.
Households might not want to pay higher mortgage rates. That’s likely true. They might tell people it will be the end of their finances if that were to happen. Most likely that’s not true. Very few households couldn’t balance higher rates, especially with the additional $150k+ in equity made over the past year.
Interest rates aren’t rising to punish the mortgage market. They’re rising to cool inflation. Rising mortgage rates impact less than a third of households, to a maximum of a third of their income. In contrast, inflation impacts 100% of income for 100% of the country.
Keeping low rates to protect a small share of homeowners from reduced profits is silly. Doing it while 100% of the population provides an indirect subsidy with higher inflation? That’s just bad math.