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

·4 min read
Calgary resident Nichola Penny, 36, just finished her master's degree in counselling with plans to become a psychologist after a maternity leave. She's been hoping to secure a mortgage but worries rising interest rates might price her out of the homes she's been looking at. (Joel Dryden/CBC - image credit)
Calgary resident Nichola Penny, 36, just finished her master's degree in counselling with plans to become a psychologist after a maternity leave. She's been hoping to secure a mortgage but worries rising interest rates might price her out of the homes she's been looking at. (Joel Dryden/CBC - image credit)

As was predicted by economists, the Bank of Canada raised its lending rate to 1.5 per cent on Wednesday, a move intended to stave off skyrocketing inflation across the country.

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

"Higher interest rates mean that if you have debt, you're about to get more of it," said Ronald Kneebone, a 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 in context, 1.5 per cent still sits well below high interest rates in Canada that were in double digits in the 1980s before being slashed below two per cent during the 2008 financial crisis.

But it's likely that this latest hike won't be the last as the central bank fights back against inflation, which has reached its highest rate in decades. As Albertans and Canadians have watched their food, gas and housing bills skyrocket, it's left the central bank in a sort of double bind.

Monthly inflation

Though the cost of living has posed serious financial pain for many, Alberta's specific context as among the provinces facing the highest average debt and delinquency rate also poses concern when it comes to rate hikes.

"It's what I call the great consumer squeeze. Households are being squeezed financially by different sides," said Charles St-Arnaud, chief economist with Alberta Central, which is the central banking facility for the province's credit unions.

That "squeeze," St-Arnaud said, will likely see households reducing their discretionary spending to offset a higher cost of living and the higher costs of servicing debt.

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

Average consumer debt by province

Housing market

For Albertans, the most visible impact of the increase could 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 with the Calgary Real Estate Board (CREB), said sales have started to trend down in Alberta — though there are some caveats.

"March was an all-time record high in terms of overall sales activity. And we have to remember that lots of people were trying to get into the market ahead of rate gains," she said.

Activity slowed down slightly in April, according to the CREB, but was still a record high for the month with 3,401 sales, a gain of six per cent over past year. It's expected that CREB's May numbers will begin to show more of a trend downward.

"I do expect that we should start to see sales kind of taper off from those record levels that we had last year but still remain strong based off of longer-term trends, just because our economy's in a much better situation now," Lurie said.

She noted that to this point, there has not been enough supply on the market.

Joel Dryden/CBC
Joel Dryden/CBC

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

"It's going to price out the people who have marginal budgets, even middle class people who just can't qualify based upon the stress tests or based upon just needing something that's a lower rate," she said. "Because even the homes themselves are getting so expensive."

Mortgage "stress tests" were increased by Ottawa in 2021 and continue to increase in line with rate hikes.

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

But Kneebone said potential homebuyers should always ask themselves whether they could still make payments if interest rates go up by two or three percentage points.

"That's just a way of covering your risk. You don't want to be in a situation of just being able to make your payments at a very low interest rate," he said.

"[If interest rates mean] you can no longer make these payments, you have to sell your house, maybe at a loss — which we have seen in the past. In the early '80s, this was happening a lot — that can be a real financial disaster for you."

Anis Heydari/CBC
Anis Heydari/CBC

Of course, Canada is not the only country raising interest rates. In early May, the U.S. federal reserve hiked its own lending rate by the largest amount in 22 years.

That poses some questions for the broader economy with slower consumer spending and declines in the housing market, according to St-Arnaud.

"You need exports and business investments to take the lead to keep growth going," he said.

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