OTTAWA -- Auto sales will be one of the first economic sectors to suffer if looming rate hikes by the Bank of Canada come to fruition, experts warn.
Craig Wright, chief economist at the Royal Bank of Canada, said he expects rates to rise only gradually, slowing housing and auto sales.
"We borrowed a bit from the future so I would expect a cooling in housing as well as consumer more generally, including autos, partly because of rate increases but also because we brought forward activity and you get a bit of an air pocket after a while," Wright said.
A rate hike will put financial stress on indebted Canadians and potentially exacerbate a slowdown in the nation's long housing boom, credit experts and real estate analysts said.
David Macdonald, senior economist at the left-leaning Canadian Centre for Policy Alternatives, said economic growth is a bigger worry than loan defaults.
The central bank last week switched to a hawkish stance after years of ultra-low interest rates and just months after saying more rate cuts were possible, raising the spectre of higher debt burdens on heavily leveraged households.
Canadian household debt has risen 51.5 per cent since 2009, when the housing boom started, to $2 trillion, and mortgages now account for about 66 per cent of that, according to Statistics Canada. The debt-to-disposable income ratio is at a near-record 166.9 per cent, meaning Canadians owe $1.67 for every dollar of disposable income.
"Consumers retrench when they do not feel the wealth effect of ever increasing house prices," he said. "So instead of putting that money into the economy, you spend it paying down debt and you see a widespread economic impact ... it spirals."