MP Report: The Real Pain of Interest Rate Hikes

MP Report: The housing crisis in Canada is very real - Tracy Gray, MP

We've now seen the 10th consecutive increase in Canada's benchmark interest rate in under a year and a half, rising to 5%. While many economists expected the Bank of Canada's increase, it was terrible news to local mortgage holders and small business owners in the Okanagan, who are already struggling with the ripple effects of the last interest rate hikes.

A 5% interest rate has not been seen in Canada since March 2001, 22 years ago.

In June 2020, when the Prime Minister was asked whether his historically high spending might trigger higher inflation and interest rates, he downplayed any possibility of rate hikes. The Governor of the Bank of Canada said at the time that interest rates "are going to be unusually low for a long time."

The Bank of Canada (BoC) kept hiking interest rates after failing to keep inflation at a 2% target, yet we heard recently they rewarded themselves $20 million in executive bonuses in 2022.

I've heard from many local young adults about how high-interest rates have already forced them to postpone their first home purchase, creating a domino effect in the rental market as they stay renting longer. I'm also hearing from many local mortgage holders who are being hit hard with increases in mortgage payments. One resident stated their mortgage payment is now 48% of their take-home pay.

Affordable housing is defined by the Canada Mortgage and Housing Corporation (CMHC) as being 30% or less of a household's before-tax income. A 2022 Re/Max Canada Housing Affordability Index showed that the percentage of monthly income that people in the Kelowna/Central Okanagan region were paying for their monthly mortgage was a whopping 78.35%, which was before several more interest rate hikes.

The BoC examined variable-rate mortgages with fixed payments where certain mortgages will reach trigger rates sooner, in particular, those mortgage holders who signed on when interest rates were very low. These represented about 1/3 of the total outstanding mortgage debt as of November 2022. Trigger rates occur if fixed payments cover only interest and not principal. The BoC outlined how different approaches may occur, such as some lenders automatically increasing mortgage payments, others allowing for negative amortization, or some connecting with borrowers to offer options such as switching to a fixed-rate mortgage or making a lump-sum payment.

Any way you look at it, people will be paying more, squeezing family finances.

According to the Globe & Mail, mortgages with loan repayment periods longer than 30 years between February and April comprised more than a quarter of the residential loan books at TD Bank, Canadian CIBC, BMO, and RBC.

Prolonged periods of interest rate hikes, like we've seen since March 2022 in response to the government's inflationary deficits, will only stretch longer if current trends continue. Bloomberg reported last month 70, 80 even 90-year repayment plans on mortgages.

The International Monetary Fund recently warned that Canadian households run the highest risk of mortgage defaults out of the 38 mostly advanced economies using data provided by the Organization for Economic Co-Operation and Development (OECD).

Home sales overall will be affected too due to these recent interest rate hikes, with the Canadian Real Estate Association reporting cutting its forecast for home sales activity for 2023 and 2024 due to new uncertainty in the housing market.

Homeowners were told for years by both the BoC and the government that their deficit spending would have no impact on inflation or interest rates. We know this is not true, and people's households are feeling the effects.

I will continue to push the government to stop their inflationary spending and tax increases, which are causing inflation which is causing high-interest rates, which will cause increases in mortgage defaults.