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Canadians are constantly reminded that we’ve let ourselves get too deeply into debt and if the cost of that debt – interest rates – increases, we’ll be in deep yogurt.
To the extent that such debt is mortgage-based and the average price of homes has been rising, this debt should be manageable. I don’t expect a major correction in housing prices.
Just about all sizable corrections in the number of sales and prices – such as in Toronto – are in multimillion-dollar homes. Because of their size, these drops disproportionately affect the average numbers. However, they have relatively little impact on the homes where most of us live.
Nevertheless, higher interest rates could affect our monthly mortgage and loan payments, depending on the terms.
So why do interest rates have to go up?
Interest rates are a tool central banks use to keep the economy in balance, preventing the weakness of high unemployment and overheated high inflation.
When an economy tends toward recession, traditional economic theory prescribes a low-interest rate remedy. Low rates make it easier for businesses to borrow and invest, creating jobs. Low rates also encourage consumers to borrow and spend, which feeds economic activity.
And when an economy is booming, employment is high and inflation threatens, economic wisdom tells us to raise interest rates. This discourages spending and investment, by businesses and consumers, thus cooling things down.
This all made sense when most Canadians were in their earning, spending and borrowing years. But does it still make sense today, as the Canadian population gets significantly older?
The 2016 census showed that more than 18 per cent of us are 65 or older – the highest this share has ever been. And normally at 65, people have stopped working and live off pensions and savings. Those 55 to 64 years old make up another 14 per cent of the population. Some members of that group are retired, and the rest are thinking about it and planning for it. And those 50 to 54, nearing their senior years, make up the largest single five-year age group in Canada.
This aging pattern isn’t likely to change soon. More Canadians are over 55 than under 25.
As you approach retirement and/or years of lower earnings, you tend to spend less. The high costs of education, raising a family and finding a home are gone. Putting money aside to cushion old age becomes a priority. When a large share of the population is undergoing this shift, there are serious implications for interest rate policy.
Yet there’s no evidence that Canadian governments are paying any attention to this shift.
Raising interest rates discourages spending and investing by younger Canadians, cooling the economy.
But when people are saving for their retirement or already living off the income from their savings, higher interest rates have the opposite effect. Higher rates tend to grow your savings, meaning you can afford to spend more. And that makes the economy hotter, not cooler.
And when you’re trying to save or are living off interest income, lower rates don’t encourage spending, they discourage it. Perhaps this is why the extremely low interest rates of recent years haven’t been nearly as affective in priming the economy as many hoped.
It also means the impact of any increase in interest rates may not be as powerful as anticipated.
We often consider the potential impacts of Canada’s aging population on families and programs like health care. We should also look at the implications for monetary policy and interest rates.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.
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