Home Economy Mortgage payment shock explains slowing Canadian economy: RBC’s McKay

Mortgage payment shock explains slowing Canadian economy: RBC’s McKay

by SuperiorInvest

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Canadians are dealing with a “payments shock” and Americans are not, and that will put the two countries’ economies on divergent paths starting in 2024, according to the CEO of Canada’s largest bank.

“The U.S. economy had a hard time slowing the consumer, (while) the Canadian economy has slowed the consumer quite significantly,” Royal Bank of Canada CEO David McKay told Bloomberg TV in an interview on Sept. 17. January on the sidelines of the World Economic Forum in Davos. .

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The main culprit, McKay said, is the different mortgage payment terms in the two countries.

Canada does not have fixed 30-year mortgage contracts like those in the United States, but rather most homeowners have contracts that must be renewed at current rates every five years, or even more frequently. Floating rate mortgages are also more common in Canada.

That means heavily indebted Canadian households are being hit with higher mortgage payments, with 30 per cent of mortgage holders already facing increases of 20 to 25 per cent in their monthly outlays, he said.

“That’s been a challenge for Canadians,” McKay said.

McKay said the impact on consumers is already visible in the bank’s credit card business, where spending is “off” for those with variable-rate mortgages.

Therefore, the Canadian economy has slowed much more rapidly to the point that it already has at least a quarter of negative GDP under its belt and possibly another quarter, he said.

“Technically we’ll be in a soft landing recession early this year,” McKay said, adding that inflation in Canada remains “a little bit sticky,” around just over three per cent.

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McKay said RBC, already the sixth-largest wealth manager in the United States and the largest asset distribution and wealth manager in Canada, has significant opportunities to grow organically south of the border.

However, uncertainty surrounding the regulatory environment and rules on liquidity, capital and the “end of Basel III” – especially for US regional banks – has made things difficult for RBC’s California-based subsidiary, City National Bank. , and would make further acquisitions unlikely.

“It’s been a challenging year for regional banks,” he said. “I think I would need more clarity on those results before I could really value an American franchise at this point.”

• Email: dpaglinawan@postmedia.com

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