Higher interest rates and housing risk. Moody’s Analytics tackled both of these topics Wednesday at a Consumer Credit and Housing Outlook roundtable it hosted in Toronto.

Here are nuggets from that event, which was moderated by senior economist Mark Hopkins and analyst Cris deRitis.

• Moody’s expects it to take 10 years before rising income brings Canada’s overextended debt-to-income ratio back to its “equilibrium.” deRitis believes the number could dive from 164% last quarter to below 120.
• Rate hikes are coming (for real this time), suggested Hopkins. “We know the Federal Reserve will start tightening in 2015.”

• He added that rate increases will happen “in a very scripted fashion…so I’m not worried about a spike.”
  (Mind you, the last time U.S. Fed Chief Ben Bernanke hinted at monetary tightening, Canadian bond yields soared over 100 basis points in four months.)
• “What’s interesting….is that the Bank of Canada has started talking about how the neutral rate will be lower,” Hopkins opined. The BoC is intentionally setting expectations that rates will be “lower for longer.”
• From a housing risk standpoint, 30- to 45-year-olds with little equity and not much upside to their incomes are a primary danger group. These folks, especially if carrying above-average debt loads, are significantly more vulnerable to higher rates.
• Moody’s is worried about an oversupply of condos in Toronto, but “less so” in Vancouver and Calgary.
• Canada’s new home construction is hovering near 200,000 units a year. That’s “about as high as it’s going to go.”

Moody’s chief economist Mark Zandi also presented at this event. Two tidbits from him:

• Canada’s savings rate is now about 3.5-4.0% versus 5.5-6.0% in the U.S.
• The Bank of Canada will “follow” the U.S. Federal Reserve, which Zandi predicts will normalize rates “by 2017.” But rates will climb less on this side of the border because, among other reasons, “Canada is more rate sensitive than the U.S.”

As usual, the value in these rate predictions isn’t the predictions themselves (which are worthless over half the time). Their value is the reminder they give us to check our debt service capability in a world of 2%+ higher rates.

Rob McLister, CMT

Last modified: April 26, 2017