For sale signs line a residential street in Calgary. Nowadays, those who are lucky enough to qualify for a mortgage will pay much higher rates than they would have 10 or 20 years ago, Mike Moffatt writes.Amir Salehi/The Globe and Mail
Mortgage rates are rising in Canada, which is unwelcome news for young homebuyers. While many of the factors driving the recent increase are temporary, higher interest rates are more likely than not to be the norm for decades, widening generational inequality.
The recent rise is not unique to Canada, as global interest rates have spiked in recent weeks, with U.S. 30-year mortgage rates now exceeding 7 per cent and the yield on a 10-year U.S. government bond recently breaking the 5.2-per-cent barrier, a level not seen since 2002. Much of this is owing to energy price inflation after the closing of the Strait of Hormuz.
Gasoline and diesel prices have spiked in recent months because of the conflict, creating affordability challenges for families and making nearly everything more expensive to build, including new homes. In response, the Federal Reserve hiked interest rates in September, the Fed’s first rate hike in three years, and markets are anticipating more hikes to come.
Resolving the Hormuz conflict will reduce inflation and interest rates in the short run, but long-run factors will push rates higher over time. Day-to-day rate volatility is a fact of life, but interest rates tend to trend downward or upward over extended periods because of slow-moving demographic and economic trends.
The relative supply of funds available to borrow and the demand for them are key drivers of rate changes. If funds to borrow are scarce, lenders can name their price, and interest rates will be high; conversely, a savings glut looking for places to invest will drive rates down.
Inflation is also a key driver, as it shapes central banks’ rate decisions. From the early 1980s, when a Federal Reserve-induced recession killed spiralling inflation, to the mid-2010s, interest rates trended downward in most advanced economies as inflation appeared to be tamed.
During the 1990s and 2000s, a global savings glut pushed interest rates lower. Baby Boomers, then in their prime earning years, accumulated savings and invested them where they could, and China’s emergence as a manufacturing powerhouse drove down prices for manufactured goods and led the country to accumulate large amounts of foreign debt. Demand for credit fell as governments such as Canada ran balanced budgets, often by underinvesting in infrastructure, and as the digitization of the economy scaled back investments in large physical assets.
In recent years, many of these trends have reversed, putting upward – rather than downward – pressure on interest rates. The Trump administration is running the highest deficits the United States has seen outside of a recession or a major war, and while Canada’s federal deficit-to-GDP ratio pales in comparison with the U.S., it remains high by recent historical standards as the country reinvests in infrastructure and defence.
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The Baby Boomers, once a source of savings, are now drawing down that capital in retirement, and increased government spending on health care and old-age pensions is pushing governments to borrow more. In recent years, China has used its savings to build physical infrastructure, and the tech industry is expected to invest nearly $1-trillion in data centre construction this year alone. All of these forces put upward pressure on interest rates, as capital is scarce.
Not all of these trends pushing rates upward are guaranteed to continue – such as data centre construction – but an aging population is one factor no government can control. A secular trend of rising interest rates creates affordability challenges for young people, who are already navigating high housing costs and will ultimately pay for the interest on growing government debt to support an older population. Now, those who are lucky enough to qualify for a mortgage will pay much higher rates than they would have 10 or 20 years ago.
Governments across Canada should recognize that young talent will move to the countries that best address these challenges. They can make it easier and less expensive to build new homes, allowing lower prices to offset higher interest rates. They can put downward pressure on rates by working toward reducing deficits, and they can reform tax policy to make the country a more attractive place to invest, thereby attracting and retaining capital.
When it comes to affordability, Generation Z cannot seem to catch a break, and steadily rising interest rates is a trend they can ill afford.