LOW RATE ERA WANING

This week’s move by the Bank of Canada to raise its key interest rate a quarter of a percentage point to 0.75 per cent from 0.5 per cent was not unexpected. In advance of the increase, economists gave it a 90 per cent probability.

For many Canadians, an interest-rate increase of a quarter point is unlikely to change their circumstances. But in Vancouver, where homeowners carry the biggest mortgages in the country, any increase in interest rates merits attention.

Based on the average value of new mortgage loans in Vancouver of $438,716 (according the Canada Mortgage and Housing Corp.), the monthly payment on a fixed five-year term with a 25-year amortization at 4.79 per cent is $2,499. Although that rate will not change until the mortgage comes up for renewal, a 25 basispoint hike in the rate, to 5.04 per cent, would raise the payment by $63 a month to $2,562. That increase is not likely to put any but the most highly leveraged over the edge, but it’s $756 a year that a homeowner is not spending on consumer products and services of the sort that keep the economy humming.

Moreover, the Bank of Canada is expected to raise its benchmark interest rate by another quarter point at its next rate-setting this fall, straining household budgets even further.

Borrowers with variable rate mortgages and credit lines may already be feeling the pinch since banks typically adjust those rates within days of a bank rate increase.

A survey last year by TransUnion, a creditmonitoring firm, indicated that 718,000 consumers would face a monthly increase of $50 or more in payments to cover their debt obligations if rates rose by a quarter point.

Interest rate increases could dampen the real estate market, especially given tighter mortgage insurance rules introduced by the federal government last fall that require borrowers pass a “stress test” to gauge their ability to carry their mortgages if rates rise.

Indeed, a rate hike is not without risk. Real estate has accounted for up to half of Canada’s economic growth of late and too abrupt a disruption in the market could have negative consequences. The Conference Board of Canada forecast declines in housing starts in B.C. this year and next before the rate hike was announced.

The positive take on the Bank of Canada’s rate decision is that the economy has rebounded from the downturn of 2008-09 and the collapse of oil prices in 2014 and no longer needs the stimulus of cheap money. Gross domestic product surged 3.7 per cent in the first quarter, job growth is strong and inflation remains low.

Still, it would seem the era of historically low interest rates is over.