BoC raises alarm on household spending

The central bank's rate increases continue to weigh on consumer spending levels

BoC raises alarm on household spending

Amid sustained rate hikes, Canadian household spending – especially on home purchases and other major transactions – is likely to suffer considerable deceleration over the next several quarters, the central bank warned in its latest quarterly report.

The Oct. 26 edition of the Bank of Canada’s Monetary Policy Report added that the cost of mortgage renewal has seen a greater increase than any seen over the past three decades.

“For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate that is 1.5 to two percentage points higher at renewal,” the BoC said.

The BoC is anticipating a contraction in household spending levels in Q4 and through the first half of 2023.

“Higher interest rates weigh on household spending, with housing and big-ticket items being the most affected,” the BoC said. “Decreasing house prices, financial wealth, and consumer confidence also restrain household spending.”

Read more: Which demographic has been most financially impacted by rate hikes?

Another potential area of concern is residential investment on new construction builds, which are likely to be significantly affected by the BoC hikes.

“The contraction in residential investment that began in the second quarter of the year is projected to continue through the first half of 2023, although to a lesser degree,” the BoC said. “House prices, which rose by just over 50% between February 2020 and February 2022, have declined by just under 10%. They are projected to continue to decline, particularly in those markets that saw larger increases during the pandemic.”

Fortunately, things are expected to look up for the financial system in the latter part of next year.

“Household spending strengthens beginning in the second half of 2023 and extends through 2024,” the BoC predicted. “Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.”