In a recent study by Oxford Economics, economists have warned that ballooning mortgage payments could potentially drag the economy into a recession. The study revealed that five-year mortgage rates have surged from 3.2% in 2021 to 6.4% in the fourth quarter of 2023, more than doubling mortgage payments for homeowners.
According to Oxford Economics economists Callee Davis and Tony Stillo, the mortgage payment shock is not over yet, with payments expected to increase by another 6% to $156 billion by the end of 2024. By the end of 2027, these payments are projected to rise by 18% to $173 billion.
The study highlighted that low to medium-income households, which hold about 45% of mortgage debt in the country, will be the hardest hit by the rising mortgage payments. On the other hand, higher-income households are better equipped to deal with the increase.
However, for lower-income households with little to no buffer, the rising mortgage payments could force them to cut discretionary spending, become delinquent on their mortgages, or even sell their homes. This could have a significant impact on the economy, as these households accounted for 50% of consumption in Canada last year.
Oxford Economics’ forecast suggests that aggregate real consumer spending will slow to 0.5% this year, down from 1.7% growth in 2023, potentially leading to a mild recession. The study also highlighted uncertainties in the housing market, including further deterioration in the labor market for young people.
Overall, the study paints a concerning picture of the impact of rising mortgage payments on households and the broader economy, emphasizing the need for proactive measures to address the challenges ahead.