Feb 2011 23

British Columbia Vulnerable to Economic Downturns

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Photo by Chris Maureen Gerty Photo by Chris Maureen Gerty

A February special report was released by TD Economics assessing the financial vulnerability of households across Canadian regions. It is a well-known fact that the income-debt ratio in Canada is high, but some regions are in a more difficult situation than others. British Columbia, Alberta, Ontario and Saskatchewan will encounter greater challenges in the future, as their household debt makes them more prone to an economic surprise.

The report doesn’t aim to predict the future, its purpose is to warn the policy makers about the weaker spots in the Canadian economy, which are more vulnerable to bigger falls in housing prices, increases in interest rates and disruptions in household earnings. TD measures the regional household vulnerability index as a compound of several factors: the debt-to-income ratio, the debt-to-assets ratio, the ratio of existing home prices to income, the debt service ratio, the share of financially vulnerable households and the personal savings rate.

The vulnerability of all regions went up, but British Columbia was the most vulnerable of all Canadian provinces. BC Households recorded the highest debt-to-income ratio (160 per cent), debt-service cost and sensitivity to increasing borrowing rates. The debt-to-income ratio reached the same level as that of U.S. households right before the housing market collapse. Every tenth household is threatened with financial stress due to a potential spike in interest rates. Moreover, BC registered a negative average savings rate, which is alarming yet rather old news, as the region has always been the most vulnerable since the series of assessments began in 1999. The debt-to-asset ratio, however, is still holding below the Canadian average, which is good news.

TD calms the reader down with a prediction: these negative events, that could put households (especially in British Columbia) into a difficult situation, are not likely to occur in the coming years.

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