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High rates + high debt = real estate time bomb?

The Bank of Canada is sounding the alarm on the impact of rising interest rates on Canadian households, and the growing stress it’s projecting on the country’s financial system.

A sharp and relatively unexpected rise in interest rates has significantly increased costs for households across Canada, which could turn into the economy’s Achilles heel should a recession transpire. In particular, the central bank is concerned that “elevated interest rates and declining house prices have reduced the financial flexibility of many households.”

In response to increased mortgage servicing costs, many have turned to credit card debt to the point that it’s surpassing pre-pandemic levels. Meanwhile, the median debt service ratio of homeowners— which measures the proportion of household gross income used for mortgage debt repayments, rose to 19% in 2022.

Around 30% of new mortgages have households allocating an average of at least 25% of their income to their payments.

You can read more on the matter here.

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