Good morning,
From resilient Canadian consumers to rising housing prices, there are all kinds of factors gumming up the Bank of Canada’s goal of getting inflation back to its two per cent target, according to economists.
On one hand, consumers still have plenty of “juice” to cope with higher rates, suggests an analysis from CIBC Economics, which notes “the consumer is acting like nothing happened” despite 425 basis points of rate hikes in a 12-month period.
Benajmin Tal and Karyne Charbonneau examined a wide swath of metrics including credit-card purchases, excess cash, credit conditions and credit quality and found that “consumers send a clear message of assurance.”
For example, credit-card purchases have risen by more than 20 per cent over pre-pandemic levels since the summer, they said in a note released on April 19. But balances declined by approximately 13 per cent, suggesting Canadians want to and can afford to keep spending.
The Canadian economy has also been a jobs machine, allowing consumers to hang onto government transfer payments as excess deposits. Cash deposits have risen to $160 billion since the start of the pandemic. The CIBC economists acknowledged that wealthier people hold much of that extra cash, but the data as of December 2022 showed that even low-income people’s net worth has improved since the pandemic.
Canadians also appear to be managing the costs of servicing their debt.
In 2022, they spent about 15 per cent of their disposable income on servicing their debt, with about half going to interest payments. In 2023, CIBC estimates the cost of paying the interest on mortgages and lines of credit will rise by one per cent. But some homeowners with variable rate mortgages are, for the most part, only paying the interest, not chipping into the principal. However, consumers’ debt-servicing ratio remained below 2019 levels despite the Bank of Canada’s aggressive rate hikes.
On the housing front, global economics house Capital Economics said it expects more price gains to come because of the “collapse” in new listings, with prices ending the year higher than initially expected.
Housing prices edged up in March from February in various markets across the country. Real estate broker Royal LePage, in its latest quarterly housing report, said the average home price will end the year 4.5 per cent higher than at the end of 2022. Initially, it believed the average price would increase one per cent by the end of 2023.
“While the stabilization is good news for the near-term economic outlook, it nevertheless makes the Bank of Canada’s job harder,” said Stephen Brown, Canada economist for Capital Economics.
Housing prices also affect the consumer price index (CPI). Shelter accounted for almost 30 per cent of the CPI’s basket of goods in 2021, according to Statistics Canada. Brown said he expects inflation to moderate less because of those stronger housing prices, which could also feed into consumers’ expectations for inflation to remain higher for longer, and only gradually decline from their current elevated levels.
“All this could prompt the Bank of Canada to keep the policy unchanged longer than we expect,” Brown said.
