B.C. households may be most at risk for a major financial downturn, but we’re also more likely to be able to handle it, according to a new index by TD Economics.
The financial vulnerability index ranks B.C. home owners as the most vulnerable to an unexpected economic surprise, like a substantial correction in housing prices, or an unexpected large increase in borrowing rates.
The high cost of home ownership is the primary reason for the report’s results. B.C. households have the highest debt servicing costs in the country and the highest level of debt relative to income.
But Craig Alexander, TD’s chief economist, said as high as the results are, the situation has not changed in the past decade. B.C.’s debt service ratio, the proportion of income required to service one’s debt, has remained relatively stable, hovering around 22%, despite a debt-to-income ratio rising to 161% from 121% in 1999.
He also noted that despite higher debt loads, the share of vulnerable households in the province is at an all time low of 5.9%. The report defines vulnerable households as those with a debt-service ratio of 40% or more. If rates were to rise 2% over the next two years, Alexander said the proportion of vulnerable households would rise to 9.8%, which is similar to levels a decade ago.
“We don’t have a U.S. style problem, but B.C. household finances have become stretched and they are vulnerable if we were to have something untoward occur. But I don’t expect any of the shocks to happen.”
Alexander forecasts B.C.’s housing market to cool slightly this year, with housing sales falling 10% and prices dipping 1.4%, following an 8% gain in 2010. “I think the housing market has softened, but this is not a major housing correction.
“We think the B.C. economy is going to continue to grow 2.4% and the unemployment rate will dip. And the Bank of Canada will gradually increase interest rates; so based on our forecast, I don’t anticipate a major problem. Debt growth will slow relative to income and this is a positive thing.”