Canada’s debt-crazed households finally met their match—interest rates higher than inflation. Bank of Canada (BoC) data shows residential mortgage credit slowed even further in Q4 2023. The unusually slow quarter revealed households accumulated mortgage debt at one of the slowest rates ever, as interest rates divert capital to areas outside of housing.
Canadian Mortgage Debt Had One of The Slowest Quarters On Record
Canadians are accumulating mortgage debt at an unusually slow rate these days. The balance rose just 0.47% (+$8.46 billion) to $1.8 trillion in Q4 2023, about half the rate in the prior quarter. The rate was also the lowest growth of any quarter since 2019, and the slowest Q4 reported since 2008—back when it was in a full blown contraction.
Canadian Mortgage Borrowing Is The Slowest It’s Been In Years
The slow pace of mortgage borrowing has been a broad trend over the past year. Annual growth of 4.18% (+$72.47 billion) in Q4 marks the smallest number since Q1 2019. As for annual growth reported in the fourth quarter, one has to go back to 2009 to see a slower year-end number.
Canadian Residential Mortgage Growth (Annual)
The 12-month change in outstanding mortgage credit at institutional lenders, per quarter.
Source: Bank of Canada; Better Dwelling.
Higher Rates Hit The Pause Button On Canada’s Low Rate Bubble
A combination of factors are driving this, including prior rate cuts and the current elevated levels. When rates were cut in 2020, the desired impact is to pull purchases forward to boost competition and prices. A slowdown after normalization of rates is always expected, since the excess demand was borrowing future demand.
It’s also a predictable (and desired) impact from elevated interest rates. Rising rates not only shrink the amount of mortgage debt that can be borrowed, but also incentivize people to pay down existing debt. There’s also the additional impact of directing capital from non-productive investment to productivity-based categories, since elevated rates slow asset-based inflation.
The last point might be a critical issue. Canada’s real estate-dependent economy has played a significant role in creating what the central bank calls a “productivity crisis.” With easy, relatively low-risk profits driven in housing, there’s been little reason for investors to invest in higher-risk, innovation and manufacturing growth. An issue that’s having knock-on effects, such as motivating one of the biggest capital flights in the country’s history.
On that note, experts believe Canada will cut rates ahead of the United States. They’re currently forecasting this will occur mid-year.
