ALBERTA HOUSEHOLDS WILL BE THE HARDEST-HIT BY INTEREST RATE HIKES, SAYS THE ROYAL BANK.
Ontario, B.C. also carrying large debt loads
OTTAWA• Alberta’ s households will be hit the hardest by interest- rate increases, adding a major hurdle in the province’s ability to recover from the oil crash, according to the Royal Bank of Canada.
The moves, expected by the Bank of Canada in coming months, will affect families in Alberta more than in provinces with notoriously overpriced housing markets because a borrowing spree during the oil industry’s boom raised their average indebtedness to the highest in the country, RBC senior economist Robert Hogue wrote in a research report released Tuesday.
“Given expensive housing markets in British Columbia and Ontario, it would be natural to assume that households in those provinces would be the most vulnerable” to rising interest rates, Hogue said. “However, our research shows that Albertans would see the biggest increase in debt-service payments in Canada.”
An increase of one percentage point in interest rates would add $ 1,200 in annual debt- service costs to the average Alberta household, compared with $ 1,100 in British Columbia and $ 1,000 in Ontario, Hogue said. Households in the rest of the country would see debt- service costs rise $ 800 or less.
Canada’s household debt levels, among the highest in the developed world, are taking centre stage after the central bank lifted borrowing costs and governments imposed restrictions on mortgage credit, making it more expensive to service existing liabilities and harder to refinance. Tighter conditions may crimp Canada’s economy, which has relied on consumer spending and gains in real estate for growth over the past several years.
The Bank of Canada is expected to raise its benchmark rate to 1.75 per cent by the end of this year, from 1.25 per cent now, according to the median of 16 forecasts in a Bloomberg survey of economists. The next decision is April 18 in Ottawa.
A booming provincial economy and strong i ncome gains before the oil price collapse that began in 2014 emboldened Albertans to amass significant debt, Hogue said. Average household liabilities in the province rose to $192,000 in 2016 from $164,000 in 2010, he said. That compares with $ 174,000 in British Columbia and $154,000 in Ontario. Other provinces are “well below” the national average debt load of $ 141,000, he said.
In addition, Albertans may feel the impact of higher rates sooner, since 18 per cent of mortgage borrowers have terms of two years or less, by far the highest share in the country, Hogue said. The average household in Alberta had $124,000 in mortgage debt, with other debt such as term loans, credit lines and leases amounting to $68,000, he said.
Debt- service bills will get larger as interest rates increase. That’s “bound to cause many households to spend more cautiously on other goods and services,” Hogue wrote.
Potential i ncreases in debt- service costs “aren’t pocket change,” he added. The $ 1,200 no longer available for spending would exceed the $ 1,000 Alberta households spend on entertainment or the $ 800 they spend on furniture.