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Macklem On Household Ability To Weather Higher Rates

CANADA

Q: How much does high household leverage limit the ability to get to the top end of neutral range?

A: As we’ve highlighted in this report, there are two cross-currents. 1) Households have come through this pandemic with balance sheets in better shape as we’ve highlighted many times, with higher savings and substantial house price appreciation. That provides more of a buffer to high rates. 2) However, a segment stretched to buy homes, taking on high LTI mortgages (>450%) where now over 25% of mortgages from 15-20% prior to the pandemic. As we’re raising rates, we are watching the impacts. You have to distinguish between the average and certain segments and see how that all weighs out. The housing market is an important part of the economy but our focus is ultimately on the whole economy and getting inflation back to target.

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Q: How much does high household leverage limit the ability to get to the top end of neutral range?

A: As we’ve highlighted in this report, there are two cross-currents. 1) Households have come through this pandemic with balance sheets in better shape as we’ve highlighted many times, with higher savings and substantial house price appreciation. That provides more of a buffer to high rates. 2) However, a segment stretched to buy homes, taking on high LTI mortgages (>450%) where now over 25% of mortgages from 15-20% prior to the pandemic. As we’re raising rates, we are watching the impacts. You have to distinguish between the average and certain segments and see how that all weighs out. The housing market is an important part of the economy but our focus is ultimately on the whole economy and getting inflation back to target.