Alberta’s high average debt could ‘squeeze’ some consumers after Bank of Canada rate hike

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As economists had predicted, the Bank of Canada on Wednesday raised its key rate to 1.5%, a move designed to stave off skyrocketing inflation across the country.

That means Albertans will be preparing to pay higher rates on their mortgages and lines of credit as the bank tries to short-cut the runaway cost of living.

“Higher interest rates mean that if you have debt, you’re about to have more,” said Ronald Kneebone, professor of economics at the University of Calgary’s School of Public Policy.

“It’s not good news if you owe a lot of money when interest rates go up.”

Putting the rate into context, 1.5% remains well below the high interest rates in Canada that were in the double digits in the 1980s before dropping below 2% during the financial crisis of 2008.

But it is likely that this last hike won’t be the last as the central bank battles inflation, which has hit its highest rate in decades. As Albertans and Canadians have seen their food, gas and housing bills soar, it has left the central bank in a sort of double bind.


Although the cost of living has caused serious financial difficulties for many, the specific context of Alberta, which is one of the provinces with the highest average debt and delinquency rates, also raises concerns in regarding rate hikes.

“That’s what I call the big pressure on consumers. Households are under financial pressure from different sides,” said Charles St-Arnaud, chief economist at Alberta Central, which is the central bank for credit unions. of the province.

This “squeeze,” St-Arnaud said, will likely see households cut back on discretionary spending to offset a higher cost of living and higher debt servicing costs.

“The question is, what will happen to the debt service ratio?” he said. “Because of this high level of debt, this debt service ratio in Alberta is already one of the highest in Canada.”


housing market

For Albertans, the most visible impact of the increase may be on the province’s housing market. Such trends have already been seen across Canada after the bank’s first rate hike in March.

Ann-Marie Lurie, chief economist for the Calgary Real Estate Board (CREB), said sales have started to decline in Alberta – although there are some caveats.

“March has been a all time record in terms of overall business activity. And we have to remember that a lot of people were trying to get into the market before the rate gains,” she said.

Activity slowed slightly in April, according to CREB, but still hit a record high for the month with 3,401 sales, a 6% gain from a year ago. It is expected that the May figures from CREB will start to show a downward trend.

“I expect we will start to see sales decline from the record highs we had last year, but remain strong based on longer-term trends, simply because our economy is in a good shape. better situation now,” Lurie said. .

She noted that at this point there was not enough supply on the market.

Penny was hoping to get a small starter home to serve as her “forever home” before going on maternity leave. (Joel Dryden/CBC)

Yet all of the competing challenges in the market are making things difficult for people like Nichola Penny, 36, who was hoping to secure a mortgage before going on maternity leave.

“It’s going to lower the price for people who have marginal budgets, even middle-class people who just can’t qualify based on the stress tests or based on just needing something that is at a lower rate,” she said. “Because even the houses themselves are getting so expensive.”

Mortgage “stress tests” have been increased by Ottawa in 2021 and continue to rise alongside rate hikes.

In recent years, people have been able to borrow mortgages at very attractive interest rates.

But Kneebone said potential buyers should always consider whether they could still make payments if interest rates rise by two or three percentage points.

“It’s just a way of hedging your risk. You don’t want to be in a situation where you can just make your payments at a very low interest rate,” he said.

“[If interest rates mean] you can’t make those payments anymore, you have to sell your house, possibly at a loss — which we’ve seen in the past. In the early 80s, this happened often – it can be a real financial disaster for you.”

Ron Kneebone is a professor in the School of Public Policy at the University of Calgary. He says those with mortgages, car loans and other consumer debt should be prepared to pay more after the Bank of Canada rates hike. (Anis Heydari/CBC)

Of course, Canada is not the only country to raise interest rates. In early May, the US Federal Reserve raised its own lending rate by the largest amount in 22 years.

That poses questions for the broader economy with slowing consumer spending and a declining housing market, according to St-Arnaud.

“You need exports and business investment to take the lead in sustaining growth,” he said.

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