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Don’t expect mortgage rates to crash back down to earth anytime in the foreseeable future. Do expect the wallets and bank accounts of Canadians to wear the rigours of financial strain come 2020, believes Royce Mendes, a senior economist at CIBC.  

While Mendes isn’t throwing in the towel for consumers in Canada – where a 6% unemployment rate ensures the capacity to navigate debt loads – he acknowledges there will be a need to tighten belts. More pressing, are housing prices growing increasingly unaffordable for an increasing number of potential buyers as time passes.

Given the expected propensity for more careful spending on both housing and discretionary purchases by Canadians come 2020, the economy can no longer rest on the laurels of real estate and consumption.

Mendes explains that in July 2017, mortgage rates on five-year Government of Canada bonds were greater than they were a half-decade before. The last time this had been experienced? Almost thirty years ago.

As mortgages are directly related to these rates, Mendes expects the trend to continue. It’s hypothesized that seven out of ten Canadian homes with five-year fixed rate terms at the beginning of last year, will have higher mortgage rates when resetting come late 2020 when those with variable or other fixed terms will see escalating prices too.

With the overwhelming abundance of outstanding mortgage debt, interest rates must be increased for renewals, costing Canadians an estimated $8-billion compared to the current climate. To put it into better perspective, Mr. Mendes explains this as “half a percentage point of disposable income”.

As for other consumer credit, $600-billion outstanding will also cost Canadians a tremendous amount of money when rates reset. According to Mendes, when restrictions were put in place to put a halt on the housing markets and to prevent credit from implosion, this was the desired result for policymakers in Ottawa, B.C., and Ontario.

As a result of those policies, the idea was to pivot and focus on business investment and exports. Unfortunately, this has not come to fruition of yet and if there’s a lack of business investment, exports will fail to drive economic growth as well.

“Last quarter’s export surge was nothing more than a flash in the pan, in part due to U.S. buyers front-running their own country’s tariffs,” says Mendes. Plus, our neighbours south of the border have their own economic issues to deal with.

Interestingly enough, the central bank’s rate hikes might not be coming as fast and furious as projected by most economists. Mendes forecasts an economic growth of 1.8 per cent in 2019, and just 1.3 per cent in 2020 throughout Canada, with a potential to substantially slow down hikes.

The cost of housing is already unaffordable for the populations of Toronto and Vancouver, and they’ve only become more unattainable in the second quarter, as shown in the National Bank Financial’s most recent study. The median home price in Toronto was an astronomical $838,000 during the quarter—meaning 100 months of saving for a down payment and account for approximately 68 per cent of income. This price is actually down from the previous year, given the regulations placed upon the real estate market.

The $1-million-plus median in Vancouver is more extravagant than Toronto, and up from a year earlier. Vancouver homes need over 336 months of saving for a down payment—80 per cent of income.