As predicted by economists, the Bank of Canada on Wednesday raised its lending rate to 1.5%, a measure aimed at preventing inflation soaring across the country.
This means that Albertans will be willing to pay higher rates for their mortgages and lines of credit while the bank tries to short-circuit the uncontrolled cost of living.
“Higher interest rates mean that if you have debt, you’re about to get more debt,” said Ronald Kneebone, a professor of economics at the University of Calgary 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 is still well below the high interest rates in Canada that were double-digit in the 1980s before falling below two per cent during the crisis. financial year 2008.
But this last walk is likely it will not be the last as the central bank fights inflation, which has reached its highest rate in decades. While Albertans and Canadians have seen their food, gas and housing bills skyrocket, it has left the central bank in a kind of double bond.
While the cost of living has been a severe financial hardship for many, the specific context of Alberta, among the provinces facing the highest average debt and delinquency rate, is also worrying when it comes to ‘raise rates.
“It’s what I call high consumer pressure. Households are being financially squeezed by different sides,” said Charles St-Arnaud, chief economist at Central Alberta, which is the central bank of credit unions. province.
This “tightening,” St-Arnaud said, will likely cause households to reduce their discretionary spending to offset a higher cost of living and higher debt service costs.
“The question is, what will happen to the debt service relationship?” He said. “Because of this high level of debt, this debt service ratio in Alberta is already one of the highest in Canada.”
Home market
For Albertans, the most visible impact of the increase could be on the province’s real estate market. These trends have already been seen across Canada following the bank’s first rate hike in March.
Ann-Marie Lurie, chief economist at the Calgary Real Estate Board (CREB), said sales have begun to fall in Alberta, though there are some warnings.
“March was a maximum historical record in terms of overall sales activity. And we have to remember that a lot of people were trying to get into the market before the rate gains, “he said.
Activity slowed slightly in April, according to the CREB, but remained at an all-time high for the month with 3,401 sales, up six percent from last year. CREB’s May numbers are expected to start showing a further downward trend.
“I hope we start to see sales decline from those record levels we had last year, but they are still strong from long-term trends, just because our economy is in a much better position now. said Lurie. .
He noted that so far, there has not been enough supply in the market.
Penny hoped to secure a small initial home to serve as a “home forever” before going on maternity leave. (Joel Dryden / CBC)
Still, all the competitive challenges in the market make things difficult for people like Nichola Penny, 36, who was hoping to secure a mortgage before going on maternity leave.
“People who have marginal budgets, even middle-class people who just can’t qualify based on stress tests or based on needing something that is a lower rate, ”he said. “Because even the houses themselves are getting so expensive.”
Mortgage “stress tests” were increased by Ottawa in 2021 and continue to rise in line with rate hikes.
In recent years, people have been able to apply for mortgage loans at very attractive interest rates.
But Kneebone said potential buyers should always be wondering if they could still make payments if interest rates go up two or three percentage points.
“This is just a way to cover your risk. You don’t want to be in a situation where you can only make your payments at a very low interest rate,” he said.
“[If interest rates mean] you can no longer make these payments, you must sell your home, perhaps at a loss, which we have seen in the past. In the early 80’s, this was happening a lot, this could 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 raises rates. (Anis Heydari / CBC)
Of course, Canada is not the only country raising interest rates. In early May, the US Federal Reserve increased its own lending rate by the largest amount in 22 years.
According to St-Arnaud, this raises some questions for the economy as a whole with slower consumer spending and a decline in the housing market.
“Exports and business investment are needed to take the lead to sustain growth,” he said.