TD’s chief economist says Canadian home owners now being squeezed by variable-rate mortgages should blame the Bank of Canada for assuring them during the pandemic that rates would not rise before 2023.
In the wake of optimistic projections by Canada’s central bank—made during the pandemic when BOC was trying to project calm and stimulate the economy with ultra-low interest rates—nearly 60% of home buyers grabbed variable-rate mortgages as late as January 2022, compared to 6% at the end of 2019, according to statistics from the Canada Mortgage and Housing Corp.
A new report from TD’s Beata Caranci, the bank’s chief economist, connects this shift to BOC’s messaging by citing this statement in October 2020 from Bank of Canada governor Tiff Macklem: “You can be confident that interest rates will be low for a long time.”
Caranci, who also said the central bank waited too long to pivot to higher rates to combat inflation, note that BOC’s original messaging indicated that major rate increases wouldn’t happen until at least 2023.
“It led people down that path [taking on variable-rate mortgages] more than should have been the case,” Caranci said, in an interview with the Toronto Star.
“I think where people got caught was the speed of increases. Even if people had anticipated rates would go up, they would not have anticipated the speed of increases, because we had not had a recent historical precedent of that,” the TD economist said.
Last year, the central bank initiated seven consecutive rate heights that raised the prime lending rate in Canada to 4.25%.
Caranci also criticized the Bank of Canada for leaving rates so low as Canada absorbed a record-high wave of government-supported immigration.
Most of the immigrants, invited in by the government to help ease a labor shortage, are settling in five heavily populated urban centers in Canada, including Greater Toronto, exacerbating housing shortages and putting upward pressure on home prices, the TD report said.
Caranci said the central bank’s strategy of maintaining low rates “long after the worst of the crisis had passed” had fueled a surge in home prices, “speculative” behavior, leverage and what she called an “an injection of historic levels of household debt.”
The TD report warned that the surge in risk soon will be compounded by a what it called an “eye-popping” surge in costs to service those debts which is about to hit households across Canada.