Canadians hanging on to their savings

Households in Canada have accumulated an unprecedented amount of savings during the pandemic. But unlike the U.S., households here haven’t been drawing down on their savings at the same pace.

Thomas Feltmate, senior economist at TD Bank, noted that Canadians have been much more prudent with their money knowing that they’re facing rising prices all around them — especially as mortgage rates come up for renewal.

“And they’re basically just trying to keep some powder dry, some excess cash for when their mortgage ultimately rolls over and they’re faced with that headwind of a higher cost to service that debt,” he said at the Canadian Black Book Talk Auto 2023 conference.

Since Canadians are not drawing much from their savings, they’re not spending much in the automotive market.

“So I think we are starting to see some pullback on the consumer side of things. This is exactly what the Bank of Canada ultimately wants to see. We need to see weaker consumer spending over the next year or so such that we have further disinflationary pressure coming through,” Feltmate said.

This all comes back to high interest rates and the mortgage renewal shock that is set to play out in the near future.

“So by the end of [2023], we estimate that about 50 per cent of the outstanding stock of mortgages would have rolled over into this higher interest rate environment,” Feltmate reported. “But that still means over the next three years, we have another half of that the stock of mortgages still rolling over.”

Economists are especially focused on the 2025 and 2026 numbers. A lot of these renewals would have been pandemic buyers or those who last had their mortgage reset in 2020 or 2021 at a time when interest rates were at all-time lows.

So even the most optimistic scenario happens where the Bank of Canada has completely returned the interest rate to its typical 2.25 points by mid-2025, mortgage rates in 2025 and 2026 are probably still going to be in around 4-4.5 per cent, Feltmate said.

“And for homeowners or anyone that had their mortgage last reset in 2020 or 2021, when you could get a five-year fixed for 1.7 per cent, that’s going to be a meaningful repayment shock that these households are going to be faced with,” he added.