Debt and inflation squeezing B.C. households, Deloitte report finds

"We are expecting a fairly negative economic outlook in the province this year." — Alicia Macdonald, senior manager, economic advisory services, Deloitte Canada

The high levels of debt that B.C. households are carrying will be a key factor squeezing the province’s economic growth, according to a new report.

Households are bearing the brunt of the higher interest rates the Bank of Canada has rolled-out to fight inflation starting with higher interest payments on mortgages and greater difficulties in qualifying for mortgages, Deloitte Canada’s latest outlook has found.

In B.C., the average household debt ratio hit 210.6 per cent in the third quarter of 2022, meaning consumers owed $2.10 for every $1 they earned, according to Statistics Canada.

That means bigger interest payments on variable-rate mortgages and more expensive mortgages on renewal of fixed-rate mortgages, said Alicia Macdonald, a senior manager in Deloitte’s economic advisory division.

“But however you get there, higher interest rates mean that more of your monthly payment is going towards interest costs,” she said. “That’s money that has to come from somewhere.”

Ironically, it was frenzied real estate sales, which drove-up property prices and caused consumers to pile on debt, that helped lift B.C. out of a COVID-19-related economic downturn, Macdonald said.

The squeeze now is starting with falling home sales, which Deloitte expects will carry over into declining spending on appliances, furniture and household goods, she said.

Sales of interest-sensitive durable goods including automobiles are also expected to take a hit, according to Deloitte.

“It is definitely one of the big factors influencing the outlook in B.C.,” Macdonald said. “We are expecting a fairly negative economic outlook in the province this year.”

Canadians have started to pay down some of those near-record debt levels, Macdonald said. On a national basis, the debt-to-income-ratio has fallen slightly since the third quarter of 2022. There wasn’t comparable data on a provincial basis.

Deloitte expects that Canadians will still keep paring back spending over the first half of 2023 and, at some point, that will cut into discretionary spending on travel and food services.

“Given that we’re still ramping-up our spending on those types of activities coming out of the pandemic, we actually see less of an impact than we traditionally see,” Macdonald said.

Deloitte has still downgraded its forecast, assuming those impacts will come, which “will be reflected in a more prolonged recovery to more normal levels of activity,” she said.

depenner@postmedia.com

twitter.com/derrickpenner

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